INSIGHTThe Journal of the American Chamber of Commerce in Shanghai - Insight September 2016

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FEATURES P.16WeChat, the Social

Plumbing of China

Boston Consulting Group on consumer growth megatrends

in China and how young, e-savvy

shoppers will continue to propel China’s consumer

economy P. 7

China’sRetail Evolution

POLICY P.25Latest Developments in

U.S. FCPA Enforcement

MEMBER NEWS P.30Member Focus with Cameron

Johnson, GM of Sigmatex Asia

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Movers and shakers

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amcham shanghai

PresidentKenneth Jarrett

VP of Programs & Servicesscott Williams

VP of Administration & Finance helen ren

Directors

Business Development, Marketing & Events

Patsy liCommittees

Jessica WuCommunications & Publications

ian DriscollGovernment Relations & CSR

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INSIGHTThe Journal of the American Chamber of Commerce in Shanghai - September 2016

FEATURES

China’s Consumer Boom How young, e-savvy shoppers will continue to propel China’s consumer economy

Managing a Crisis Effectively Insight on crisis management and its reputation-saving responses

Bricks and Mortar in the Digital AgeCounteracting the recent industry shake-up

WeChat, the Social Plumbing of China A look into WeChat as a powerful marketing and communications tool

Metro in China: Adapting While GrowingQ&A with Jeroen de Groot, president of the China division of Metro AG

07

12

14

16

19

POLICY PERSPECTIVES

New China Transfer Pricing Rules Taxpayers with related party transactions need to determine where they fall under new rules

Stock Connect China’s stock connect has trouble wooing foreign investors

Latest Developments in U.S. FCPA EnforcementRecent developments and priorities in the enforcement of the Foreign Corrupt Practices Act

Unplugged What China’s internet and data restrictions mean for U.S. companies and China’s economy

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MEMBER NEWS

Member FocusWith Cameron Johnson, GM of Sigmatex Asia, a manufacturer of carbon composite materials

Board of Governors Briefing Notes from last month’s meeting

Event Report Recap of selected events from last month

Month in Pictures Selected photos from last month’s AmCham events

Committee Chair’s CornerWith Callum Douglas, co-chair of the Business Council for Sustainable Responsibility

Esoterica Baijiu Nights

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CAREER

TIMES WHEN OUTPLACEMENT WOULD BE APPROPRIATE

• Realignmentofresourcesrequirestheadjustmentofstafftomeetreducedworkload.• Economicsrequiresthereorganizationofoneormorebusinessunits.• Leadershiprecognizestheneedtomakespecificteamadjustmentsforfitorfunction.• Individualorindividualsnolongerfitsthefuturecorporatedirection.

5 REASONS WHY COMPANIES ENGAGE CORNERSTONE

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CONTACT US:SimonWan,ChiefExecutiveEmail:simon-wan@cornerstone-group.comCornerstoneInternationalGroup-CareerPartnersWebsite:www.cornerstone-group.com&www.cpiworld.com

OUTPLACEMENTCAREER TRANSITION COACHING

OrganizationsengageCornerstonetotransitionemployeesoutwithdignityandcoachthemthroughthejobsearchprocess.

REPUTATION ARE WORTH THE INVESTMENT

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This summer in San Francisco, two

observations struck me. First, I felt liber-

ated to have fast, unfettered access to

internet sites, regardless of where they

were hosted. Second, I was struck by how

many Chinese people work in Silicon Val-

ley. Walking the Google campus seemed

almost like touring Baidu or Lenovo or any

other high-tech campus in China.

These observations are not new, but why

are so many Chinese going abroad now? Is

a slowing economy the only reason?

Fostering innovation and building an

information-based economy are corner-

stones of China’s current economic plan.

The government is also determined to

make Shanghai an international financial

center. How does a blocked internet fig-

ure into this?

President Xi has been abundantly

clear about his goals. He unveiled his

internet sovereignty doctrine in Novem-

ber 2014 at the World Internet Confer-

ence in Wuzhen, and has been pushing

like-minded countries to adopt it. His

plan describes an internet within China’s

borders that is controlled by the govern-

ment and separate from the rest of the

world. He followed this with new rules

for data localization and demands for

back doors into secured networks and

products. The media, according to Mr. Xi,

should serve the Party.

AmCham’s recent publication, titled

“Unplugged,” encourages China to move

in a different direction. “...the (Chinese)

government sees the internet as an im-

portant battlefield of ideas that must be

carefully managed and controlled, not as

an open source of ideas that can facilitate

innovation and promote China’s economic

development.”

Over the years China has aligned with

the rest of the world in many ways. On

climate change China has committed to

common goals that will help save our

planet. China has also led by alleviating

poverty and eradicating illiteracy. But

on the issue of internet and media, we

couldn’t be further apart.

China is not America. In America’s sys-

tem, the media play a critical role keeping

our government in check. The internet,

ideally, is meant to be free from govern-

ment interference and controlled by no

one. People and businesses have chosen

to come to China, and in so doing submit

to China’s laws. We are increasingly feel-

ing the pinch. In AmCham’s 2016 business

climate survey, 81 percent of respondents

cited internet access as among their top

business challenges. True, we make more

use of foreign websites than our Chinese

counterparts do, but internet controls are

affecting business results for all of us.

In the end China suffers more. China’s

innovators and intellectuals are hobbled

without access to the same resources,

data and ideas as their global counter-

parts. Internet policy restrictions are ac-

celerating the outflow of intellectual tal-

ent, explaining why Silicon Valley looks

like it does today.

For most Chinese, internet controls are

not a concern. They can’t use Google, but

they’re happy with Baidu. The problem

here is internet controls make Chinese

society more inward-looking and isolated.

Ironically, this occurs just as China is tak-

ing its place on the world stage as a “great

power” and Chinese society has a chance

to shake off its turbulent history and truly

end its decades of isolation. At this crucial

time in China’s development as a society,

the government’s internet policy cuts its

people off from the outside world.

Isolation also deprives us of China’s

contributions. China has produced highly

successful technology companies that

provide amazing services. WeChat, for

example, puts simple messaging apps

to shame. It’s a great product that should

sweep global markets, just as Facebook

and Twitter have. Why hasn’t this hap-

pened? People typically think barely a

nanosecond about where internet services

are hosted. Unless that place is China. In

China, the government will block, censor,

or monitor our data as a matter of policy.

China is not likely to imitate the West

when it comes to media. China’s goal has

always been to modernize, not Western-

ize. How will China handle the control of

information within its borders? How will it

foster innovation and retain talent? Can

Shanghai become an international finan-

cial center while restricting information

available to traders? Mr. Xi holds the an-

swers, and with them the future of China. I

Chairman’S Letter

Ker GIBBSChair of the Board of Governors

6

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GOVerNMeNT

Li Qiang was named

party secretary of

Jiangsu province.

Prior to this, he was

the governor of

Zhejiang province. Li

served as party

secretary of Wenzhou, a big city in

Zhejiang from 2002 to 2004. After that, he

was promoted to be the secretary-

general of the Zhejiang provincial

committee. In 2011, he became vice

governor of Zhejiang province.

Liu Xiaoming was

recently promoted to

be the vice minister of

Transport. Liu joined

the ministry of

Transport in 2014. From

1988 to 2003, he

studied and worked at Beijing University of

Technology. After that, he held leadership

positions at the Beijing municipal

commission of Transport, and most recently

served as party secretary and director of

the commission.

Yang Yue was named

vice governor of

Jiangsu province.

Previously, Yang was

the party secretary of

Fuzhou, the capital of

Fujian province. He

became a standing committee member of

Fujian province at the end of 2008. Before

that, he was the chairman of the All China

Youth Federation and executive secretary

of the Communist Youth League’s Central

Committee.

PrIVATe SeCTOr

WaLmartDirk Van den Berghe

will become president

and CeO of Walmart

China as well as

regional president of

Walmart’s Asia

business, which includes operations in Japan.

Van den Berghe joined Walmart in

Canada in 2014. Under his leadership, the

Canadian division expanded its

supercenter format, grew its grocery

business and launched online click and

collect services in Ottawa and Toronto.

Before that, Van den Berghe had worked

for Delhaize Group for 15 years, most recently

as CeO of Delhaize Group’s supermarket

business in Belgium and Luxembourg.

In addition to his retail background, Van

den Berghe spent two decades teaching

business at leading universities across

europe, Asia and the United States. He

also has more than a decade of diplomatic

and trade experience as Belgium’s

International Trade Commissioner.

Van den Berghe earned a Ph.D. in

economics from Sofia University in

Bulgaria and speaks seven languages,

including english, French and Dutch.

miCrosoftalain Crozier was

named chairman and

chief executive of

Microsoft Greater China

region. He is

responsible for the

strategic and operational leadership covering

all of Microsoft’s product, service and support

offerings across Great China and continuing

the company’s transformation into the

leading productivity and platform company

for the mobile–first, cloud-first era.

Crozier is a 29 year veteran of Microsoft.

He has held various leadership positions

globally. Most recently, he was president of

Microsoft France. Before joining Microsoft,

Crozier worked for Lesieur Alimentaire and

Peat Marwick Consultants.

He has a bachelor’s degree in mathematics

and social sciences from University Claude

Bernard and a business administration degree

from Institut Superieur de Gestion.

aiGAIG announced the

appointment of Debbie

Wilson as chief

financial officer for

Australia and head of

finance for Greater

China and Australasia. Wilson joined AIG in

2011 as chief financial officer for AIG New

Zealand (NZ). She was acting general

manager for AIG NZ from June 2014 to

February 2015. Prior to joining AIG, Wilson

held positions at Lumley General Insurance

(NZ) Ltd, ACE Insurance (NZ) Limited, Marsh

Limited, and General Accident Asia Pacific

(GAAP). She holds a BBus in Accounting from

Auckland University of Technology.

aetna internationaL tim Cocchi has been

appointed as Aetna

International VP,

China Market. Based

in Shanghai, Cocchi is

responsible for all of Aetna’s business in

China, including risk and service entities,

and has general manager responsibility

for all Aetna staff in China.

Cocchi has over 30 years of

experience in the insurance industry,

which includes over 15 years on overseas

assignments. He has served in several

cross functional positions and has been

responsible for P&L results in over 10

countries and regions in europe, Middle

east and Asia.

Cocchi holds an MBA degree from the

University of Connecticut and a B.S. in Finance

degree from Western New england College.

Movers and Shakers highlights major personnel changes within the Chinese government at various levels and senior management-level movements within multinational companies in China

If your company has

executive personnel changes,

please contact Junling Cui at

junling.cui@amcham-shanghai.org.

Sept

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Movers and shakers

7

While much of the world

focuses on signs of

slowing growth in

China’s industrial sector, relatively

little attention has been paid to a

more encouraging development

for the nation’s economy: personal

consumption continues to grow at

a healthy pace. And while the pace

of spending will likely cool in the

months ahead, the overall trajectory

is bullish for the foreseeable future.

Household consumption in China

grew by 8.8 percent in the first half

of 2016, even though GDP growth

slowed to 7.2 percent in nominal

terms and financial markets experi-

enced volatility. We project that by

2020, China’s consumer economy

will further expand by about half, to

US$6.5 trillion—even if GDP growth

slows to 5.5 percent, which is below

the official target. The incremental

growth of $2.3 trillion over the next

five years would be comparable to

adding a consumer market 1.3 times

the size of today’s Germany or the

UK to the global economy.

There are several reasons China

is likely to remain one of the world’s

biggest growth markets for con-

sumer-product companies. One

is that incomes continue to rise

for China’s swelling ranks of mid-

dle-class and affluent consumers

— those with annual household in-

comes of more than $24,000. even

though the rate of growth is down

slightly from 2016, average house-

hold incomes rose by 8.7 percent in

the first half of 2016.

As a result, Chinese consumers

are still willing to spend. The most

recent consumer-sentiment survey

by The Boston Consulting Group’s

Center for Customer Insight found

that three-quarters of Chinese con-

sumers plan to maintain or increase

their level of spending in 2016 and

that two in five expect to “trade up”

to higher-value products, particu-

larly for baby products, consumer

electronics and financial services.

(See “China’s Consumers Stay the

(Slightly Slower) Course,” BCG Per-

spectives, July 2016.)

Drivers of continued growthThree longer-term megatrends

will continue to drive growth in con-

sumer demand in the years ahead.

They are the continued rise of the

upper-middle class and affluent

households; a new generation of

free-spending, sophisticated con-

sumers and the increasingly powerful

role of e-commerce. (See Exhibit 1.)

In fact, research by BCG and Alire-

search, the research arm of Alibaba,

has found that these three great forces

of change will transform the nature of

consumption in China over the next

five years. They are also propelling the

emergence of a two-speed consumer

economy. Consumption is growing at

a high speed in upper-income brack-

ets, among the younger generation

and in e-commerce channels, while it

is decelerating among lower-income

and older-generation consumers and

in traditional retail channels. (See The

New China Playbook: Young, Affluent,

e-savvy Consumers Will Fuel Growth,

BCG Focus, December 2015.)

As we will explain below, the rise of

e-commerce does not mean that com-

panies should begin to retreat from

brick-and-mortar retail stores — they

will continue to be important. rather,

success will largely depend on compa-

nies’ ability to succeed in an “omnichan-

nel” market in which online and offline

retailing complement each other.

Companies will need a new play-

book to capture the coming wave of

growth. The strategies of the past will

no longer be relevant.

This is how the three great forces

of change are transforming China’s

consumer market:

the rise of the upper-middle class.

China’s consumer economy is enter-

ing a new era of demographic change.

Until very recently, growth was mainly

powered by what we call the emerg-

ing-middle class, households with an-

nual disposable income of US$10,000

to $16,000, and middle class, those

with incomes of $16,000 to $24,000.

The new driver is the dramatic rise

of upper-middle-class households

($24,000 to $46,000 in annual dispos-

able income) and affluent households

(more than $46,000). Such households

account for 17 percent of all urban

households in China now. But we proj-

ect that their number will double to 100

million by 2020. They will account for 55

percent of Chinese urban consump-

tion and 81 percent of its incremental

growth — or $1.5 trillion — over the next

five years. Consumption by upper-mid-

dle-class and affluent households is

growing more than three times faster

than among emerging-middle and

middle-class households.

Companies won’t be able to cap-

ture the loyalty of upper-middle-class

and affluent households by focusing

on China’s major metropolitan areas.

By Youchi Kuo, Jeff Walters, Angela Wang and Vincent Lui

China’s Consumer BoomHow Young, E-Savvy Shoppers Will Continue to Propel China’s Consumer Economy

FEATURES

Youchi Kuo is a 10-year BCG veteran and leads its China Center for Customer Insight (CCI). Among other things, the CCI produces an annual review of Chinese consumer megatrends.

Jeff Walters is a partner and managing director at BCG. He joined BCG in 2003 and is a leader of the firm’s Greater China Consumer Goods and Retail practice, and also leads the firm’s Center for Consumer and Customer Insight in Emer-ging Markets.

Coverstory

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8

Over the next five years, spending on consumer services is projected to grow by 11% per year and account for 51% of growth in urban consumption.

Number of upper-middle-class and affluent consumers outside of

China’s top 100 cities.

4598

2015 2020

Number of Chinese cities with more than 100,000 upper-middle-class and

affluent consumers.

195cities

cities373

2015 2020

Over the next five years,consumer e-commerce is projected to:

Even if China’s GDP growth slows to 5.5%, personal consumptionis projected to increase by about half, to $6.5 trillion, by 2020.

But growth is only part of the story: demographic, social, and technological forces will transform China’s consumer economy.

Five Trends Transforming China’s Consumer Economy

Consumers aged 35 or younger today spend a greater share of their incomes than their elders and are projected to accountfor 65% of consumption growth from 2015 through 2020.

The Emergenceof a New Generation

The Growing Power of E-Commerce

The ContinuingImportance of Small Cities

Services WillDrive Growth

Share of Chinese consumers saying theyrecently spent money on these services.

Emerging-middle- and middle-class households = annual disposable income of $10,001 to $24,000.

Upper-middle-class households = annual disposable income of $24,001 to $46,000.

Affluent households = more than $46,000 in annual disposable income.

LEGEND:

Eating out

50% 73%

Personal care and fitness

49%32%

EntertainmentOutbound travel

53% 68%17% 45%

Education

30% 37%

Emerging-middle and middle class Upper-middle class and affluent

Companies will have to venture beyond the biggest metro areas to capture China’s growth opportunities. More than 300 Chinese cities

will have high concentrations of upper-income consumers.

To capture the biggest growth opportunities in China, consumer product companies need to develop strategies designed

to win over wealthier, younger, more tech-savvy consumers, who are spread across an expanse of cities.

Source: This infographic is based on research conductedby BCG’s Center for Customer Insight.

The Rise of theUpper-Middle Class

With 410 million online shoppers in China, e-commerce now accounts for 15% of private consumption, up from 3% in 2010.

These upper-middle-classand affluent households will account for 81% of China’s incremental consumption through 2020.

Households earning more than $24,000 annually will increase their consumption by 17% per year through 2020.

Number of Chinese households earning more than $24,000.

50

100

2015 2020

2005 2010 2015 2020

25%

36%45%

53%

Share of urban consumption by Chinese born after 1980.

Compared with their elders, Chinese aged 35 and younger are

eight times more likelyto be college graduates,

far more brand conscious

twice as likely to have traveled overseas

China’s Consumer Boom Will Continue

Generate annual revenue growth of 20% per year, compared with 6% growth at physical retail outlets

Grow from $600 billion in annual sales to $1.5 trillion

Account for 24% of all consumer transactions

Account for 42% ofall growth in Chinese consumption

million

million

million

million

Read BCG’s latest insights, analysis, and viewpoints at bcgperspectives.com

© The Boston Consulting Group, Inc. 2016. All rights reserved. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcgperspectives.com. Please direct questions to socialmedia@bcg.com.

Over the next five years, spending on consumer services is projected to grow by 11% per year and account for 51% of growth in urban consumption.

Number of upper-middle-class and affluent consumers outside of

China’s top 100 cities.

4598

2015 2020

Number of Chinese cities with more than 100,000 upper-middle-class and

affluent consumers.

195cities

cities373

2015 2020

Over the next five years,consumer e-commerce is projected to:

Even if China’s GDP growth slows to 5.5%, personal consumptionis projected to increase by about half, to $6.5 trillion, by 2020.

But growth is only part of the story: demographic, social, and technological forces will transform China’s consumer economy.

Five Trends Transforming China’s Consumer Economy

Consumers aged 35 or younger today spend a greater share of their incomes than their elders and are projected to accountfor 65% of consumption growth from 2015 through 2020.

The Emergenceof a New Generation

The Growing Power of E-Commerce

The ContinuingImportance of Small Cities

Services WillDrive Growth

Share of Chinese consumers saying theyrecently spent money on these services.

Emerging-middle- and middle-class households = annual disposable income of $10,001 to $24,000.

Upper-middle-class households = annual disposable income of $24,001 to $46,000.

Affluent households = more than $46,000 in annual disposable income.

LEGEND:

Eating out

50% 73%

Personal care and fitness

49%32%

EntertainmentOutbound travel

53% 68%17% 45%

Education

30% 37%

Emerging-middle and middle class Upper-middle class and affluent

Companies will have to venture beyond the biggest metro areas to capture China’s growth opportunities. More than 300 Chinese cities

will have high concentrations of upper-income consumers.

To capture the biggest growth opportunities in China, consumer product companies need to develop strategies designed

to win over wealthier, younger, more tech-savvy consumers, who are spread across an expanse of cities.

Source: This infographic is based on research conductedby BCG’s Center for Customer Insight.

The Rise of theUpper-Middle Class

With 410 million online shoppers in China, e-commerce now accounts for 15% of private consumption, up from 3% in 2010.

These upper-middle-classand affluent households will account for 81% of China’s incremental consumption through 2020.

Households earning more than $24,000 annually will increase their consumption by 17% per year through 2020.

Number of Chinese households earning more than $24,000.

50

100

2015 2020

2005 2010 2015 2020

25%

36%45%

53%

Share of urban consumption by Chinese born after 1980.

Compared with their elders, Chinese aged 35 and younger are

eight times more likelyto be college graduates,

far more brand conscious

twice as likely to have traveled overseas

China’s Consumer Boom Will Continue

Generate annual revenue growth of 20% per year, compared with 6% growth at physical retail outlets

Grow from $600 billion in annual sales to $1.5 trillion

Account for 24% of all consumer transactions

Account for 42% ofall growth in Chinese consumption

million

million

million

million

Read BCG’s latest insights, analysis, and viewpoints at bcgperspectives.com

© The Boston Consulting Group, Inc. 2016. All rights reserved. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcgperspectives.com. Please direct questions to socialmedia@bcg.com.

CO

VE

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TO

RY [exhibit 1] five trends transforming China’s Consumer economy

Sept

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FEATURES

9

The number of such households in

huge metropolises such as Beijing,

Shanghai and Guangzhou will grow

by 10 percent annually and reach 30

million in 2020. But of the 46 million

additional upper-middle-class and

affluent households that will emerge

in China by 2020, half will likely reside

outside the top 100 cities. And to reach

80 percent of this market in 2020, we

estimate that companies will need a

presence in at least 430 cities.

a new generation. People born

after 1980 are poised to become the

dominant force in the consumer mar-

ket. Consumption by young-generation

Chinese consumers is growing at a 13

percent annual rate — twice the pace

of consumers older than 35. The share

of total consumption by the young gen-

eration is projected to increase from 45

percent to 53 percent by 2020.

Our data show that upper-mid-

dle-class consumers aged 35 and

younger average 40 percent higher

spending, across a range of prod-

uct categories, than their elders with

similar incomes. In a recent BCG

global consumer survey, 42 percent

of Chinese aged 18 to 25 disagreed

with the statement, “I feel I have

enough things and feel less the need

to buy new ones.” By comparison, 36

percent of U.S. and eU respondents

of that age group, 32 percent of Jap-

anese, and only 26 percent of Brazil-

ians offered that response.

Young-generation Chinese also

tend to be more sophisticated con-

sumers than those older than 35. They

are eight times more likely to be col-

lege graduates. They travel overseas

twice as much. And they are more

brand-conscious than older Chinese

and U.S. consumers of the same age.

the growing role of e-commerce.

In 2010, online transactions made up only

3 percent of total private consumption.

The number of Chinese online shoppers

has since nearly tripled, to 410 million, as

has the amount that the average con-

sumer spends online. Online channels

now account for 15 percent of private

consumption.

Over the next five years, private on-

line consumption is projected to surge

by 20 percent annually, compared with

6 percent annual growth in offline retail

sales. This means that e-commerce will

account for 42 percent of growth in pri-

vate consumption. By then, China’s online

consumer market will have grown to $1.6

trillion annually — 24 percent of private

consumption.

Mobile e-commerce, which al-

ready accounts for 51 percent of all

online sales in China, compared with

a global average of 35 percent, will

grow even faster. Chinese households

already buy 15 percent of their small

appliances, 16 percent of their apparel

and household sundries, and 19 per-

cent of their skincare and cosmetic

products through mobile devices.

e-commerce drives consumption

growth by helping companies over-

come distribution challenges associ-

ated with reaching a national market

and by dramatically expanding the

reach of their brands. When we ana-

lyzed Taobao sales of several leading

premium face-care brands that already

have fairly wide coverage in depart-

ment stores, we found that 45 percent

of sales were from the thousands of

cities that don’t have those goods in

stores. The trend was similar for fashion

apparel and baby education products.

Understanding China’s evolving e-commerce marketTo succeed in a market led by

young, increasingly affluent, e-savvy

consumers, many companies still

need to overcome some major mis-

conceptions, especially regarding

the growing role of e-commerce.

One prevailing myth is that online

transactions merely cannibalize

sales from brick-and-mortar stores.

Others are that online primarily ap-

peals to single young adults and

that the main reason people buy on-

line is to find bargain prices.

To understand how Chinese con-

sumers use e-commerce, BCG tracked

the consumption of 180 families for one

month. We found that, in reality, e-com-

merce brings opportunities to greatly

boost demand for new products. To win,

companies need a strong omnichannel

strategy that combines both an online

and an offline retail presence and that

addresses the fast-growing family mar-

ket. Companies should also recognize

that there is substantial demand for high-quality products with

premium prices.

The following are some of our key findings:

e-commerce creates new demand. As consumers

grow more affluent, their spending on fast-moving con-

sumer goods (FMCGs), such as packaged food and bev-

erage, personal care, and home care products, increases

only moderately. Nonetheless, when we looked into con-

sumer online consumption patterns, Taobao data shows

that online purchases in these categories increase by 150

percent when Chinese households enter the upper mid-

dle class and nearly doubles again among affluent house-

holds. (See Exhibit 2.)

[exhibit 2] online Channels stimulate new Demand

Packaged F&BConsumption per cap (Index)

Personal CareConsumption per cap (Index)

Home CareConsumption per cap (Index)

Source: BCG China Category Consumption database, BCG China CCI, Taobao sales data, AliResearch

OfflineOnline

OfflineOnline

OfflineOnline

Poor & Aspirant

1

2

3

4

5

EMC Middle class UMC Affluent

Poor & Aspirant

1

2

3

4

5

EMC Middle class UMC Affluent

Poor & Aspirant

1

2

3

4

5

EMC Middle class UMC Affluent

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The greater convenience and prod-

uct choice offered by e-commerce

helps stimulate new demand. New ser-

vice offerings and business models by

online retailers, such as delivery on de-

mand, free returns and exchanges, cus-

tomized services, and innovative social

interactions, further boost demand.

online shopping complements

offline retail channels. While it is true

that online is quickly penetrating across

categories, starting from apparel and

baby products to FMCGs or even fresh

groceries, for the majority of the cate-

gories, consumers still do most of their

buying in physical retail stores. In fact,

Chinese consumers are true omni-

channel shoppers. According to our re-

search, for example, 16 percent of Chi-

nese households use both online and

physical retail channels to purchase

packaged foods and beverages, while

28 percent do so to buy skincare prod-

ucts and 39 percent do so for apparel.

(See Exhibit 3.)

Consumers still like to go out and

shop, but the role of the offline physi-

cal store is evolving. The main focus of

offline shopping now is less about buy-

ing products, and more about enjoying

the overall experiences, having fun with

friends and families and interacting with

the brands and products (e.g., trying out

new models, etc.).

Young families are the driv-

ing force of e-commerce. Sin-

gle young adults were the early

adopters of e-commerce in China.

These days, families with preschool

children are the fastest-growing

segment of the e-commerce con-

sumer market. That is largely be-

cause these households have very

busy lifestyles that make it difficult

to get outdoors to shop, and there-

fore place a high priority on con-

venience. Currently young families

are already spending 20 percent of

their household discretionary ex-

penditures online, and the ratio will

double in five years. We project that

by 2020, the 85 million young fami-

lies with children under seven years

old will be spending around US$3.8

trillion annually online, accounting

for nearly 40 percent of e-com-

merce consumer spending.

“online” does not mean “cheap.”

There is a common misperception

that the main motive for Chinese

consumers to shop online is to

find bargains. In many cases, con-

sumers actually pay higher prices

for goods they purchase online,

whether through their home PCs

or mobile devices. Chinese con-

sumers are also willing to pay a

premium for convenience and for

higher-quality products they can-

not find in local retail stores. Our

research also found that this was

true for seven of the nine prod-

uct categories that we tracked.

In household and personal-care

products, prices consumers pay

for goods purchased through their

mobile devices tend to be around

50 percent higher than what they

pay for comparable products in

physical retail outlets. The prices

of foods and beverages purchased

on a PC tend to be 50 percent to

150 percent higher. According to

Taobao, average expenditure per

e-shopper on online organic and

imported food and beverage has

expanded eightfold over the past

three years.

Winning in China’s omnichannel marketThere is no doubt that China

must remain a priority, as it will re-

main one of the world’s most im-

portant growth markets. However,

China’s consumer market in the

digital era will pose both huge op-

portunities and competitive chal-

lenges for companies.

More than ever, companies

need to understand the areas

where Chinese consumers are

eager and willing to spend, be-

cause the action is shifting to dif-

ferent product categories, brand-

ing strategies and retail channels.

The winning strategies of the past

are becoming outdated. To win

in China’s new consumer mar-

ket, companies need a new set of

strategies. Nonetheless, the good

news is that it is not too late to de-

velop a winning Chinese strategy

– the digital behaviors of consum-

ers are still being defined.

In this digital era, many brands

and retailers are trying to trans-

form and adapt to the chang-

ing consumer needs. Just as no

companies are equal, there is no

standard transformation model

or speed of change. The key to

success is to clarify the myths,

develop blueprints to long-term

strategies and implementation,

and be flexible with regard to

changes. True leaders in the om-

nichannel era are those able to

adjust their direction and pace

nimbly. I

Alcohol

0%

20%

40%

60%

80%

100%

Personalcare

Householdcare

Householdsundries

BabyProducts

Skincare Apparel

Onlineonly

Offlineonly

BothOnline& Offline

FreshFood

PackagedFood &

Beverage

7 7

6 2

8 10 16

3

17 19

27 28

3928

39

[exhibit 3] omnichannel Has Become a new norm to many Consumers in China

% of households

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Benjamin Franklin said that “it takes

many good deeds to build a good

reputation, and only one bad one to

lose it.” In an age when news travels almost

instantaneously across online and social

media portals, the way a company responds

to a crisis threatening its reputation can de-

termine whether it survives or sinks.

The Swedish furniture company IKeA

earlier this year did a recall in the United

States of some of its chests and drawers

after toppling accidents killed six children,

but it did not initially extend the recall to

the China market, saying their products met

China’s quality and safety standards. In July,

following two weeks of public pressure and

rebukes from China’s state media, it belat-

edly announced a recall of 1.7 million chests

and drawers that had been sold to Chinese

customers.

IKeA’s attitude and the delay did not sit

well with Chinese consumers. Product safe-

ty has always been a big concern in this mar-

ket, and awareness of consumer rights has

risen over the past decade, heightened by

a long string of incidents, from melamine-

tainted baby formula and faulty automotive

engines to expired meat products. In the

minds of many, IKeA had not treated their

Chinese customers as fairly as their Ameri-

can customers, and the condemnations of

the company’s recall policies spread quick-

ly across social media. At the same time,

China’s media lambasted IKeA’s response

as both arrogant and a blatant shirking of

responsibility. Government organizations in

Shenzhen, Nanjing and Tianjin echoed the

message with their own statements criticiz-

ing IKeA’s decision.

The uproar might have been avoided if

IKeA had exercised better judgment in pro-

ducing an effective response to consum-

ers, says Cindy Tian, Asia-Pacific vice chair

at edelman, a global communications and

marketing firm.

“If we look at the statement [IKeA] issued

in China and how they made the recall after

the government stepped in on July 12, you

can see how they broadened the issue it-

self – meaning they first tried to say that the

broader issue was not their own issue,” she

says.

In the company’s initial view, the respon-

sibility lay with government regulators. Their

customers felt otherwise. The perception

gap between how the company viewed the

issue and how the customers viewed it re-

sulted in a damaging blow to IKeA’s brand

image.

That the IKEA recall was finally extended

to China reflects the growing influence of

social media. When traditional media was

the main source of information, companies

had more time to construct an official re-

sponse. Not so anymore. Today, dissatisfac-

tion with a product’s quality or a company’s

policies can be – and is – shared with mil-

lions instantaneously.

Crises in the digital age are a challenge

that many companies grapple with, and in-

effective management of a crisis can nega-

tively impact both reputation and sales. In

the latest Global Risk Management Report

from the risk management group AON, re-

spondents for the first time ranked “damage

to reputation/brand” as the top risk to their

companies, above economic slowdown and

regulatory/legislative change.

Foreign brands in China are especially

susceptible to scrutiny in the media, and

the reputational fallout can have a signifi-

cant impact on the bottom line. In 2014 Mc-

Donald’s and KFC were embroiled in a food

safety scandal after Shanghai TV revealed

that one of their suppliers was supplying

the chains with expired meat. Though Mc-

Donald’s and KFC quickly apologized and

immediately switched suppliers, many cus-

tomers lost trust in the brands and sales de-

clined sharply in the ensuing months. Yum!

Brands, the parent company of KFC, report-

ed a 9 percent decrease in overall system

sales and 14 percent in same-store sales for

China in the third quarter earnings following

the scandal.

Though most companies recognize in a

general way the cost of reputational dam-

age, many are inadequately prepared to

deal with sudden crises. A recent Deloitte

risk management survey of company board

members’ confidence in their organizations’

crisis-related abilities found that while al-

most three-quarters of respondents felt

they were vulnerable to a crisis involving

corporate reputation, only 39 percent had a

crisis plan.

Crisis playbookCrisis management starts with crisis pre-

vention. “Knowing who is engaging with the

brand is essential to managing reputation,”

says Jennifer Gee, senior director of Asia

corporate affairs for Gap Inc. For her com-

pany, she says, avoiding a crisis involves a

wide range of issues contributing to build-

ing a good reputation, including high qual-

ity customer experiences, engaged and

Managing a CrisiseffectivelyBy ruoping Chen

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ations is how to communicate with the

public during a crisis. Brian West, Global

managing director for crisis management

at FleishmanHillard, highlights two cases

that were initially similar, but where very dif-

ferent responses greatly affected how the

companies were subsequently viewed by

the public.

In 2014, U.S. retailer Target became a

victim of a data breach in which 40 million

payment card numbers were stolen. A year

later, healthcare insurer Anthem Blue Cross

had 80 million of their members’ and em-

ployees’ personal information stolen from

their data center. Target remained silent

while investigating the extent of the breach,

while Anthem Blue Cross announced their

breach immediately, assuring customers

that they would make up any financial loss

and pay for the restoration of identities that

had been compromised.

“It’s an interesting issue, because [Target

was] almost considering it as if it’s their data,

but in fact it’s their customers’ data,” says

West, “and when it all came out about the

breach, their share price dropped off sig-

nificantly and it destroyed trust.” Conversely,

by communicating effectively with their

customers, Anthem Blue Cross was able to

build trust with them and other stakehold-

ers, and their share price rose.

West believes that trust has to play a

starring role in reputation management.

When companies in the midst of a crisis

decide to communicate early on and keep

communicating with the public, they es-

tablish trust that the company is transpar-

ent and is holding itself accountable in a

responsible way. Social media, though it

creates challenges, also presents an op-

portunity for a company to respond directly

to key stakeholders quickly, without being

filtered through a journalist’s story lens. This

allows the company to control the narrative

surrounding a crisis from the outset and all

‘Ello, I wish to register a complaint

committed employees, sustainable supply

chains with responsible suppliers, compli-

ance with laws and regulations, and corpo-

rate social responsibility programs.

Keeping an open dialogue with stake-

holders also helps Gap Inc. to offset the

potential for problems by building stron-

ger connections and listening to concerns.

“For example, [at Gap Inc.] we set up a 24/7

customer hotline as one of the channels for

customers to give their feedback. For em-

ployees, we have an ‘open-door policy’ and

other employee feedback mechanisms,

such as surveys and in-person sessions to

answer questions,” she says.

even when protective measures are

implemented, they may be insufficient

to prevent a crisis. There are also added

complexities to operating in China, a fast-

moving market of highly social consumers.

“China’s market is a complicated market. It’s

very big,” says edelman’s Tian. “So if a prod-

uct is being sold in many locations, then that

is very challenging.”

She cites a variety of difficulties compa-

nies may face when in the midst of a crisis in

China. Controlling a recall may be a logistical

nightmare if the infrastructure is not in place

to handle it. Overlapping industry policies

from different government bodies (both lo-

cal and national) can complicate regulatory

matters considerably. Keeping up with and

effectively countering unsubstantiated, ru-

mor-based reports on social media can be

time consuming for a company.

For such cases, it’s important for compa-

nies to be prepared for when a crisis does

arise. every industry and every location may

require a different set of actions and respons-

es, but in general, corporate crisis manage-

ment plans typically comprise a similar set

of protocols and rules. This includes deter-

mining which incidents should be elevated

to crisis level; establishing an operational

team of executives, Hr, public relations, le-

gal and other relevant departments to serve

as the crisis management “nerve center”;

creating an action plan with prioritized tasks

and timeframes for completion; developing

a messaging strategy to communicate with

key stakeholders; setting policies for em-

ployee conduct and the handling of media

requests; and monitoring the news and so-

cial media for what people are saying about

the company, brand or product.

first respondersOne of the most important consider-

the way through.

“It’s an opportunity for a company to do

things such as put a statement on its web-

site, do a video with the spokesperson on

the issue and use social engine marketing

to drive traffic to the website to say ‘here is

the truth, here are the facts on the matter’,”

says West.

The alacrity of one’s response will also

impact the way a crisis is perceived. even

when many of the facts surrounding a cri-

sis are still unclear, Tian recommends that

companies respond to a crisis within two

hours. “When I say response, I don’t mean

you have to issue an announcement, but the

speed of response and ability to take action

should be much faster than ever before.”

A lack of a response, on the other hand,

can generate uncertainty and dissatisfac-

tion and create a vacuum for others to fill,

while an immediate denial or an admission

of guilt will leave a bad impression with au-

diences. Instead, the better option is to con-

vey a commitment to investigating the issue

and finding a resolution.

Though communication strategies will

differ from case to case, there are common

elements in those responses that are likely

to resonate well with audiences. Accord-

ing to Tian, “concern, action and perspec-

tive” are the three keywords every company

should keep in mind when formulating their

responses to a crisis. Companies should

express concern and care for the affected

people and communities and show willing-

ness to take ownership of the problem. They

should also relay what actions they are tak-

ing to investigate the situation and ensure

that it won’t happen again. Finally, they

should offer perspective, a presentation of

the whole picture, as audiences are often

unaware of all the facts and details.

Nobody wants a crisis to happen. But

when one does, companies should meet

them head-on. While plans and playbooks

can be a great help in navigating through

a crisis, it is the company’s leadership who

must be seen as taking charge – communi-

cating authentically with the audience and

steering the company through its crisis.

“Companies produce annual reports that

talk about how important their customers

are, how important their staff and all these

different audiences are,” says West. “A cri-

sis is an opportunity to bring that to life and

make it real so that you’re focusing not just

on trying to manage a crisis, but demon-

strating leadership in a crisis.” I

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In recent years, the Internet in Chi-

na, coupled with improving tech-

nology has resulted in the balloon-

ing of e-commerce and this has led

to online shopping greatly shaking

up retail in the region. Not only does

it offer a vast selection of goods and

products at often lower prices, but

it also provides consumers in China

with the convenience of shopping

from anywhere. On an annual basis,

this has given rise to e-commerce

commanding a greater and greater

slice of the China retail sales pie. All is

not lost for bricks and mortar stores,

however, and recently they have

been staging a fightback. One way

stores have been doing this, espe-

cially in the country’s first- and major

second-tier cities, is to incorporate

in-store technology to enhance the

customer shopping experience.

the store of the future –

interactivity is key

For shoppers, it’s all about the

in-store experience. If the shopping

experience is a memorable and en-

joyable one, they are more likely

to become repeat customers and

spread the word among friends and

on social media. Stores in China un-

derstand this and many are now ef-

fectively executing an omnichannel

tactic that is able to create a retail

environment which entirely immers-

es and engages the customer. In the

near future, in-store customers in

China will be able to swiftly and ef-

fortlessly locate the item they are

seeking and gain the answer to any

purchase question or query at the

touch of a screen.

This interactivity will be one of

the major features of the bricks and

mortar store of the future. As a result,

consumers in China will soon be able

to dynamically engage with an in-

store good or product to gain more

knowledge, without the need for a

sales assistant.

technology leads to inventory and

sales processing efficiency

In-store technology in China

will also let consumers view a

store’s complete product range.

As such, there will be less need to

keep shelves stocked. One physi-

cal article can represent all of its

size and color variations to offer

the look and feel, while the re-

maining stock can be stored at the

back of the store or in an off-site

warehouse, set for instantaneous

delivery (Figure 1).

figure 1: in-store technology facili-

tating inventory efficiency

New in-store technology in China

will also be used much more in the

future to get rid of long queues at

the checkout as item sales are pro-

cessed. Given the number of active

bricks and mortar shoppers in China,

this is much needed. In the future,

item orders and payment will be pro-

cessed from a number of different lo-

cations in-store, without the need for

a sales assistant.

This will greatly add to shopping

convenience, make the shopping

experience that much more plea-

surable and better ensure repeat

buying.

technology – two-way benefit

In China today, consumers are

spoiled for choice in terms of the

amount of technology they have

at hand. What’s more, they are not

afraid to use it. Another way for

bricks and mortar stores in the re-

gion to increase sales is to better

know their customers, especially

their product preferences and their

shopping habits. Knowing more

about their customers, bricks and

mortar stores will be better able to

align goods and products to cus-

tomer tastes as well as better able

to launch effective sales campaigns

to increase sales.

Today, bricks and mortar stores in

China are using technology to best ef-

fect to drive potential sales by setting

up customised smartphone applica-

tions which not only generate an om-

ni-channel experience for the store’s

Bricks and Mortar in the Digital AgeCounteracting the recent industry shake-up

By shaun Brodie

Shaun BrodieDirector, Head of China Strategy Research DTZ/Cushman& Wakefield

Brodie analyzes

information

and data for

all property

sectors in China

and produces

white papers,

research reports,

and regular

DTZ/Cushman

& Wakefield

property market

publications. He

is both a char-

tered surveyor

and a chartered

builder and is

the chairman

of AmCham

Shanghai’s Real

Estate

Committee.

Source: DTZ/Cushman & Wakefield Research

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Movers and shakers

15

identification, audience measure-

ment can then facilitate a more

targeted in-store sales campaign

based around the advertising of

suggested items to purchase that

are more suited to the demograph-

ic of the individual shopper at the

given time. Once one shopper va-

cates a particular part of the store

and another customer enters, the

sales campaign content changes

(Figure 3).

figure 3: in-store technology get-

ting the measure of consumers to

increase sales

augmented reality technology – cre-

shoppers, but, importantly, provide

the store with valuable insight into the

shopping habits and preferences of

its customers (Figure 2).

figure 2: apps – Providing insight into

shopping behaviour

audience measurement technology –

more targeted sales

Audience measurement is an-

other form of new technology like-

ly to be used by more and more

retailers in China to further engage

consumers within the store and to

drive sales. As a customer brows-

es, this technology can and will be

used to identify the demographic

of the shopper. Immediately upon

ating an amazing experience

Finally, augmented reality is an-

other form of new technology which

will be implemented and used more

often by retailers to enhance the

in-store shopping experience. Aug-

mented reality, when used properly,

will add an appealing visual aesthet-

ic to the store and make the overall

consumer experience that much

more entertaining, enjoyable and

memorable. For example, as a repeat

customer enters or leaves the store,

sensors will be able to recognise the

customer. The front window display

can then be turned into a message

board to personally welcome the

shopper as he or she enters the store,

and to thank him or her for shopping

as the shopper leaves.

Ultimately, it is about producing

an intimate and pertinent in-store

experience that the customer will

remember. Upon doing this success-

fully, stores in the near future in Chi-

na will be able to enjoy higher sales

and, in doing so, will be able to retake

some of the lost ground recently

ceded to e-commerce. I

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Source: DTZ/Cushman & Wakefield Research

Source: DTZ/Cushman & Wakefield Research

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In first-tier and third-tier cities alike, We-

Chat has taken over as one of the most

important mobile apps in China. While

standing in elevators, waiting for public

transit or sitting in restaurants, you will see

people staring at their phones, and most

of them are on WeChat. The numbers tell

a compelling story. By the end of March

this year, WeChat had about 805 million

monthly active users.

More than just a great communication

channel, WeChat is an intricate network of

useful tools that connect people, services

and businesses. Through its integration

of chatting and useful everyday features

such as digital wallets and bill payment,

the application is capable of handling al-

most all of a user’s online and offline needs.

Try to imagine an agglomeration of Face-

book, Instagram, Snapchat, Groupon, Yelp,

WhatsApp, Skype, Twitter, Uber, Tumblr,

Amazon, Paypal, Flipboard, news, games,

travel booking and utilities payment. With

so many easy-to-use features, WeChat has

also evolved from a personal to business

platform. In many ways it has become our

second business communication inbox.

That’s why WeChat can be classified as

a new type of utility. Its functions have be-

come an integral part of our modern lives

that we can no longer function without. It is

the social plumbing of China.

The diagram below helps to visualize the

full breadth of WeChat services.

WeChat, the social Plumbing of ChinaBy flora Liu

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WeChat as a marketing and sales toolWeChat is an incredibly power-

ful and effective sales and marketing

tool, and many companies already

place it at the center of their consumer

connection strategy. Not only does

WeChat have a lot of users, but each

user spends a significant amount of

time on WeChat each day. According

to the latest WeChat Social Influence

report released by its owner, Tencent,

61 percent of WeChat users open the

app more than 10 times a day and 61.4

percent of users check their Moments

feed each time they open WeChat. And

WeChat is now the second-most-pop-

ular news distribution channel (second

only to news blogs), overtaking both

news websites and TV combined.

Brands also find it easier to “close

the loop” and drive sales on WeChat

because people trust the platform and

have become comfortable spend-

ing money on it. For instance, over

70 percent of all users consistently

spend more than rMB100 per month

on WeChat. That is a proven market of

roughly 534 million people.

But most importantly, WeChat al-

lows brands to directly engage and

delight customers in real-time. At

the same time, its private permis-

sion-based nature gives consumers

complete control over how and how

much they interact with brands. If a

brand consistently pushes uninterest-

ing and irrelevant content, its followers

can easily “unfollow” it and end the re-

lationship.

the opportunities are huge, but there are challengesFor all the reasons listed above,

WeChat is becoming a major mar-

keting channel in China. According

to Tencent, 64 percent of official ac-

counts invested in their accounts last

year, and 8 percent of them spent

more than rMB100,000 on account

development and operations. While

most foreign companies know that

WeChat is a must-have channel in

their marketing roadmap, few of them

have a clear idea regarding execution.

The most daunting challenge is

making the mindset shift from push-

ing outbound content to delivering

responsive experiences. WeChat

grants users instant gratification, thus

it is important to take the time to cre-

ate relevant and valuable services.

For example, when an unattractive

offer sends subscribers a push notifi-

cation, it can result in immediate un-

follows. Constant platform updates

and changes also make it difficult to

keep a company’s campaigns up-to-

date and relevant.

The other great challenge facing

WeChat marketers is technical. Ten-

cent is virtually a black box when it

comes to account data and analytics,

which makes it very difficult to track,

measure and optimize marketing

efforts. As a result, many compa-

nies are unsure about measuring

success and return on investment

(ROI) for WeChat. Additionally, most

well-known marketing platforms that

work well in a company’s other global

markets do not support WeChat,

which means that proven effective

strategies and campaigns cannot be

easily localized for the China market.

How WeChat actually works as a marketing toolWeChat is a communication chan-

nel between friends and family, and its

unique selling point is its ability to inte-

grate brands into these conversations.

Chat app marketing is still a relatively

recent development, but it offers a

new type of experience: one-to-one,

on-demand, and dynamic. There are

three key phases of WeChat marketing

based on an organization’s readiness

and investments. I call this progression

the Social Marketing Maturity scale.

Most companies of all shapes and

sizes begin their WeChat marketing

campaign at the 1.0 phase. Gener-

ally speaking, companies venture

into this realm with limited human

and technical resources. They only

use the official WeChat backend to

access most basic features such

as content publishing, simple cam-

paigns and menu links.

As they move into the 2.0 phase,

companies begin to work with data

and social CrMs. They now have

more resources to track follower be-

havior, integrate data warehouses,

and conduct simple segmented mar-

keting. In this phase, companies begin

to integrate services or build WeChat

specific features such as loyalty pro-

grams and customer service.

Finally, upon reaching the 3.0

phase, companies will fully capital-

ize on WeChat’s powerful features.

They will create truly personalized

customer experiences, collect and

analyze user-generated data, bridge

the O2O gap, and offer conveniences

such as lead nurturing and e-com-

merce support. Leading brands are

beginning to plan and move in this

direction, but they are still in the early

stages.

examples of successful WeChat strategies Successful WeChat strategies de-

liver value to followers by doing one

or more of the following:

1. Make life easier

2. Offer fun and entertainment

3. Provide instant gratification

4. Free giveaways

5. Build communities

Social 1.0: BasicsSocial 2.0:

Data Foundation BuildingSocial 3.0:

Personal Connection

• Campaigns

• Content Marketing

• Links to Website & Ecommerce

• Default Platform

• Follower Action Tracking

• Campaign Integration

• Content Tagging

• Community Building

• Stystems Integration

• SCRM Platform & Analytics

• Fully Integrated Campaigns

• Fully Segmented Content Marketing

• Personalized Customer Experiences

• Single Customer View SCRM

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McDonald’s does a spectacular

job of delivering all of these value

areas through WeChat. McDonald’s

uses WeChat’s Qr code feature to

give out coupons to use in stores

(O2O), take orders (provides useful

services) and delight customers with

the “Design your own McDonald’s

burger” feature.

Nike takes a different approach

with their runClub WeChat commu-

nity. They operate a successful loy-

alty program on this account, which

includes online engagements, lucky

draws, and membership cards. The

account also keeps followers up-to-

date with Nike events such as spon-

sored competitions, celebrity ath-

lete partnerships and new product

launches.

Dior recently became the first

brand to successfully sell luxury

handbags directly through WeChat.

For Chinese Valentine’s day, the luxury

label posted a limited edition small

Lady Dior for sale on WeChat, which

sold out in just two days. According

to the 2015 China Luxury Forecast,

36 percent of Chinese respondents

said that they would like to buy lux-

ury products online, a rise from the

previous year’s 24 percent. Thus We-

Chat, the most-used mobile app, is

an increasingly valuable e-commerce

channel for luxury brands in China.

The key to the success for all

these campaigns was the ability to

deliver targeted value at the right

time to their customers.

the future for american companies

on WeChatAs of now, most companies,

American or Chinese, are not fully

utilizing WeChat’s tremendous pow-

ers. But many American companies

have begun to put Social Market-

ing, Data and CrM teams in place to

understand and utilize WeChat. As

a result, many of the best-run We-

Chat accounts come from American

brands.

We are often asked whether

WeChat is a worthy long-term in-

vestment for American companies.

A few years from now, will consum-

ers still be using WeChat in a way

that is meaningful for brands? Given

the fact that this is China, a rapidly

changing socioeconomic entity, it is

difficult to predict what will happen

five or ten years from now. But along

with most of our customers, we be-

lieve that, given the high switching

costs, WeChat will continue to be the

dominant social app for the next two

to three years, which is a lifetime in

China. Moreover, mobile messaging

apps are new and their full market-

ing potential is only now being ex-

plored. Chat apps make connections

and communication extremely fast

and efficient between brands and

consumers, and China is leading the

world in realizing their powers.

As consumers will continue to

value speed and convenience, there

is very little risk, and a lot of upside, to

investing in WeChat. We are already

seeing a lot of success in deliver-

ing customer service, e-commerce,

marketing campaigns, content mar-

keting and community building on

WeChat. More innovative successes

will develop in the future. I

aaron Chang

is CeO and

founder of

JINGdigital, a

company that

helps leading

brands cre-

ate connections with consum-

ers on WeChat. Chang worked

in advertising in New York with

McCann Erickson, before find-

ing his true calling in the web

during the dot.com boom in

Seattle. He moved to Shanghai

in 2006 and in 2013 launched

JINGdigital. JINGsocial is a

WeChat marketing automa-

tion and analytics platform

that works with Fortune 1000

companies.

McDonald’s O2O Coupon Campaign

Nike Run Club

Lady Dior Valentine’s Day Sale

1!

McDonald’s Image!

3!

Dior Image!

Flora Liu

Liu graduated

from the Univer-

sity of Pennsyl-

vania’s Wharton

School and has

spent the past

four years in

Silicon Valley

and Shanghai

working with

cutting-edge

tech startups.

Sept

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6

Movers and shakers

19

Jeroen de Groot is President of

the China division of Metro AG,

the Germany-based cash-and-

carry food company. His past roles

include serving as the company’s

managing director in Poland, Hun-

gary and russia. He holds a degree

in business administration from the

University of Amsterdam. De Groot

spoke to Insight about selling food in

China, the power of WeChat and the

disruptive force of Internet-based

food suppliers.

How many stores do you have in

China now?

We have 83 stores in 58 cities. We

opened in China in 1996, exactly 20

years ago, and the first one was here

in Shanghai.

What factors does metro consider

when deciding to enter a new country?

There’s a feasibility team that goes

into a country to look at the potential

of the market and customers that are

relevant to Metro. We consider the

competitive situation, the develop-

ment of the economy, the investment

opportunity, political stability, access

barriers. There are many factors you

consider when you open a new mar-

ket. The feasibility team will spend

half a year studying the market, and

then there is quite some time spent

in preliminary set-up work. You can’t

start with one store, you have to start

with five or six. Sometimes you can-

not find the right locations or the fea-

sibility study is not accurate. We start

a teasing advertising campaign one

month before we open.

Can you describe the typical metro

customer in shanghai?

Metro has two dimensions of

customers. One is professional cus-

tomers like independent restaurants,

independent shop owners, compa-

nies, offices, canteens. In China we

are quite unique: there are no legal

restrictions preventing us from open-

ing our doors to private customers.

In that group, we have a clear target:

a younger, wealthier Chinese cus-

tomer who takes care of their health

and cares about quality and safety

for them and their family; often a

car owner of above average income

and middle to affluent middle-class.

Within that group, of course, there is

big differentiation.

What motivates your customers to

shop at metro?

In China it is very clearly because

we have built a very strong position

and reputation on reliability, quality

and food safety. It is recognized by

customers as well as by the govern-

ment. I dare to say that Metro is the

leader in this field. We have never

had a major issue or even a minor

issue, because we take a lot of mea-

sures to mitigate risks with quality.

For B2B customers, we have built

a food catering academy downstairs

(at the Zhenbei Lu location). We have

a food service delivery organization

that is focused on big customers.

One aim is to support them to be-

come more successful in their busi-

ness. We estimate that more than

50 percent of store sales are private

sales, but we don’t ask at the check-

out whether the sale is business or

private.

a lot of middle-class Chinese are

concerned about food safety. at the

farm level, how do you know that

your vegetables are grown without

overuse of fertilizers or pesticides?

every farmer who wants to de-

liver to Metro or is selected by our

Offer Management department has

to agree to cooperate with our in-

ternal StarFarm department. They

will be assessed on their processes,

and we either train their staff in how

to improve their current practices or

we work with third parties like Bayer

Metro in China: Adapting While Growing

Q&a

By ian Driscoll

20

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Crop Science for pesticide use or

with another company on seeding

technology. We try to really improve

the production process from the be-

ginning. All the different steps are

then recorded in a system called

StarFarm.

A total of 3,500 products are

traceable back to the farm, includ-

ing knowing how it’s grown and

how much fertilizer is used, and we

do regular unannounced checks on

these farms. People who do not per-

sistently follow the rules will not be a

supplier for a long time, but if people

forget to wear a mouth cap it’s not

considered a grave incident.

WeChat is an increasingly impor-

tant tool for marketers in China.

How do you use it to engage with

your current customers or to gener-

ate new customers?

For 50 years, Metro communi-

cated with customers every two

weeks through Metro Mail, a printed

promotional tool. In China we sent

out 1.7 million physical printed mails

to customers in our database who fit

certain buying criteria. We found that

there was no impact, so we stopped

printing the mailers and started

building a WeChat platform that

opened in 2014. In January 2015, we

had 16,000 followers, now we have

3.3 million. It’s the most important

communication platform that Metro

has.

WeChat is replacing – almost –

our website. The loyalty program

that Metro runs is done over WeChat.

You can see your buying history, the

number of points you have collected,

you can see what you can redeem.

Our offers and store information goes

there. We have a store WeChat and

a corporate Wechat and together

they have about five million WeChat

followers. The website still has more

than one million unique visitors a

month, but not many people key in

the UrL. Visitors land either through

WeChat, a Qr code or other ways.

the death of the brick-and-mor-

tar store has been talked about

for some time. Has internet use in

China changed the way you oper-

ate?

We are mainly in the food busi-

ness, and about four to five percent is

now done on e-commerce platforms.

I think the Internet has changed peo-

ple a lot: They are more informed,

and prices are completely transpar-

ent, online and offline. E-commerce

initiatives from new companies of-

fer incredible service and very low

prices. Of course, there’s not a clear

earning model behind it, but they

have changed the behavior and ex-

pectations of customers.

Whereas in the past a next-day

delivery was normal, it’s now out-

dated. People are used to getting

their order within one hour. No one

can deliver within one hour profitably,

but as long as there are venture cap-

italists funding these initiatives, it will

change people’s expectations. The

impact here has been huge, even if

the offline business is still very big in

the food area.

Will the online-ordered grocery

market continue to grow?

I have seen scenarios for [online

ordered and delivered] food that

range from 31 percent to 10-15 per-

cent. It depends a bit on how much

is indeed invested into models that

don’t make money. As long as ven-

ture capitalists and private equity

want to invest in these companies,

it will continue. But companies need

to earn money – we need to earn

money because we have sharehold-

ers. We have looked at these com-

panies to see if we should partner

with them, but their burn rates are

shocking, and it’s not very easy for

traditional companies to maneuver in

these kinds of environments. There

will be a moment of rationalization,

but I don’t know if it will be in five

years’ time or two years’ time.

But the fact remains that e-com-

merce has taken an important place

in the lives of people. expectations

have changed and we have to deal

with that. We are constantly adapting

our e-commerce and we have to be

more relevant for customers e-com-

merce-wise, so you cannot say we

are a typical brick-and-mortar store.

We have our Metro Mall connected

to our stores and we sell quite a bit

through T-Mall. A pure brick-and-

mortar store does not exist anymore.

What is the largest difference be-

tween your stores here and those

back in Germany?

Physically, not much. Of course I

see big differences, but the general

customer won’t. The stores in eu-

rope are generally bigger because

they were built in a time when offline

shopping was important. About 90

percent of our products in China are

sourced locally, so these are Chinese

products in our Chinese stores. Our

international products are sourced

for Chinese consumers.

How do you see the market in China

changing? How will you survive

here?

China is about customer focus

Cash and carry comes to China

Jeroen de Groot

Sept

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6

Movers and shakers

21

and, more and more, about agility.

Agility is the key to surviving in a

market like China. Ten years ago, 15

years ago, when I worked in a market,

I knew how it would look in five years’

time. There was a common pattern.

If you asked me now how China will

look in five years’ time, I’d have to

say I have no clue. even Chinese col-

leagues won’t dare say, change hap-

pens so fast. You can only say that

you will be agile, adaptive to devel-

opments, and try to jump on the right

trends or develop the trends. You

cannot sit still and do what you did

the last 50 years. That is what makes

China challenging compared to other

countries. The rest of the world is

much more structured.

Yes, [the West] has Amazon, Uber

and Airbnb, and they disrupt mar-

kets and industries. But the speed

in China is faster. To give you an ex-

ample, Didi Kuaidi is doing more trips

in Shanghai than Uber is in the rest

of the world. The scale of the mar-

ket is so big that domestic initiatives

can succeed so much more quickly.

That’s how WalMart became so good

– because they had a huge domestic

market and could expand and ex-

pand and get better at what they did.

We have always had to go outside of

our own market.

You were previously in russia. Did

anything about russia better pre-

pare you for the role you have here?

I have worked in 13 different coun-

tries and managed seven different

countries at Metro. The whole experi-

ence builds you as a manager and as

a person and enables you to under-

stand foreign cultures more quickly,

to see commonalities in the cultures.

There’s no country that prepares you

for another country.

Since opening the first China store

in 1996, can you name any strategic

or operational mistakes that you

have made and since corrected?

Alongside market changes, we

are always modifying strategies, but

this should not be considered as cor-

rection of mistakes. For instance, be-

fore 2014, we focused on many areas.

We were doing a good job in most of

those areas and we wanted to be a

generalist. But we are now focusing

on five channels because we believe

dedicated focus will make us into

multi-channel experts and leaders to

achieve faster growth.

How much has your industry been

affected by the economic slow-

down and rising rent and labor

costs?

We are very confident about

China’s economy. GDP growth rate at

6 or 7 percent by the world’s second

largest economy will generate huge

market opportunities. Of course,

there are challenges like those you

mention, but there are more oppor-

tunities as well, like the growing mid-

dle class, who will create more de-

mand for safe and high quality foods,

import foods etc. I

MOVERS AND SHAkERS FEATURES

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olds, deadlines and critical items for the different transfer pricing documents that

China taxpayers will need to submit to the local tax authorities, in respect of the

year ending 31 December 2016:

Note 1: RPTs under an advance pricing agreement in execution may be exempt from the Local File and Special Issue File requirements, and their amounts may also be excluded from the thresholds for these files.Note 2: Taxpayers with only domestic RPTs may be exempt from the Local File, Master File and Special Issue File requirements.

Jeff Yuan and

Paul Tang

are based in

Shanghai and

are the Greater

China transfer

pricing leader

and transfer

pricing partner

with PwC

China, respec-

tively.

Deborah Li is

based in Hong

Kong and is a

transfer pricing

senior manager

with PwC Hong

Kong. PwC

China and

Hong Kong’s

transfer pricing

practice has

over 200 full

time tran-

sfer pricing

professionals

with coverage

across 26 cities.

New China transfer Pricingrules 9 August 2016By Jeff Yuan, Paul Tang and Deborah Li

New transfer pricing rules mean

that China taxpayers with re-

lated party transactions will

need to determine if they fall under

the new rules. For transfer pricing pur-

poses, a commonality of 25 percent

shareholding or control is generally

sufficient to designate entities or per-

sons in China as related parties.

What are the changes to the existing

transfer pricing rules?

On 29 June 2016, China’s State Ad-

ministration of Taxation (SAT) issued

the Public Notice Regarding Refining

the reporting of related-Party Trans-

actions and Administration of Transfer

Pricing Documentation (SAT Public

Notice [2016] No. 42, hereinafter re-

ferred to as “Public Notice 42”). Public

Notice 42 provides new transfer pricing

compliance requirements in China, in-

cluding annual reporting forms for re-

lated-party transactions (RPT Forms),

Country-by-Country Reporting (CbCR),

and Transfer Pricing Documenta-

tion (TPD), all of which are substantial

changes to the existing rules.

Public Notice 42 replaces the pro-

visions on related-party reporting and

transfer pricing documentation in the

previous China transfer pricing rules

(known as Guo Shui Fa [2009] No. 2, Im-

plementation Measures of Special Tax

Adjustment (Trial) and Annual Report-

ing Forms for related-Party Dealings

of enterprises of the People’s republic

of China (Guo Shui Fa [2008] No. 114)).

The number of rPT Forms has in-

creased to 22 tables (from 9 tables),

including the CbCr, while the TPD re-

quirement has adopted a three-tiered

approach, including master file, local

file and special issue file (previously,

only the local file was required).

What are the thresholds, deadlines

and critical items for the transfer pric-

ing compliance requirements?

Below is a summary of the thresh-

Documentthreshold

(Notes 1 and 2)Due Date Critical items

Annual RPT Forms

No threshold

31 May 2017 (submit as part of annual corporate income tax return)

Various disclosures on the entity including organization structure, departments, reporting line, related party tax information, effective tax rate, preferential tax treatments, profitability of sales from RPTs and non-RPTs, etc

Local File

• Transfer of tangible assets (RMB200m+)• Transfer of financial assets (RMB100m+)• Transfer of intangible assets (RMB100m+)• Other transactions in total (RMB40m+)

30 June 2017 (submit upon request)

New and additional elements include value chain analysis (e.g. financial report of participating entities, analy-sis quantifying and attributing local specific advantage, principle of profit allocation), taxpayer contribution to group’s overall profits, intragroup equity transfer (e.g. target’s details, due diligence report), outbound investment, etc

Master File

• Cross-border RPTs and belonging to a group which has pre-pared master file; or• Annual RPTs > RMB1b

Within 12 months after fiscal year of ultimate holding company (submit upon request)

Provide details on the overall group including value chain drivers and entities’ principal contribution to value creation, as well intangibles, financing activities, service arrangements and transfer pricing policies, business restructures and financial and tax positions (e.g. consolidated group financials), etc.

Spe-cial Issue File

• Cost-sharing agree-ments• Thin capitalization

30 June 2017 (submit upon request)

Cost sharing – allocation method, calculation of anticipated benefits, etcThin capitalization – demonstrate that the financial terms, amount and interest rate are comparable to inde-pendent party terms, etc

CbCR

• The ultimate parent is a Chinese tax resident enterprise and the group con-solidated revenue exceeds RMB5.5b• The ultimate parent is a non-Chinese tax resident enterprise but the China tax-payer is nominated as the CbCR report-ing entity

31 May 2017 (submit as part of annual corporate income tax return)

Various information regarding coun-try operations including financial and tax information, headcount, principal business activities, etc

23

Sept

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Movers and shakers POLICY PERSPECTIVES

What is the impact for taxpayers?

Taxpayers already subject to China’s exist-

ing transfer pricing regime for documentation

will need to prepare additional documentation

and disclosures in support of their transfer

pricing arrangements. Taxpayers that previ-

ously fell outside the documentation thresh-

olds under the old regime should reassess

whether they need to comply with the new

requirements of Public Notice 42.

As a result of the increased disclosures un-

der the new transfer pricing compliance require-

ments, taxpayers in China with cross-border

transactions will likely be under greater scrutiny

when tax authorities process the annual corpo-

rate income tax returns. It is expected that tax

authorities will rely on the new information in the

new rPT forms to select investigation targets

using their big data analytical technology and

systems. Big data is an initiative implemented by

the SAT across all levels of tax authorities, and

aims to create a systematic process to analyze

the relevant tax exposure and identify potential

tax investigation targets.

Immediate next steps for multinational cor-

porations (MNCs), especially their China enti-

ties, include collecting and preparing the in-

formation for submission to the tax authorities.

Some of this information may not be under

the management or control of the local China

accounting and finance function, and extend

to confidential information which may only be

held by other local functions such as human

resources and commercial operations (e.g.

headcount, R&D arrangements, etc), or held at

group headquarters level. MNCs should plan

(or have already planned) to meet the local

transfer pricing requirements of China and any

other relevant jurisdictions.

The flow-on effect, which has a much

greater and pervasive effect on the group’s

long term strategy, is that MNCs may expe-

rience increased pressure under a challeng-

ing economic and regulatory environment to

ensure that all aspects of their intercompany

arrangements, or at the minimum the alloca-

tion of profits to each legal entity, are aligned

with the functions performed, assets owned,

and risks borne by the same legal entity. In

some circumstances, double taxation issues

may arise and need to be settled via the com-

petent authorities of each country under the

double tax treaty framework.

What are some of the specific considerations

for a Us-parented mnC with a China entity?

While both the U.S. and China belong to

the G20 group of countries that instigated the

OECD’s base erosion and profit shifting (BEPS)

initiative, the application of OeCD BePS princi-

ples in each jurisdiction is ultimately governed

by domestic tax law and international treaties

ratified by each government.

This means that U.S.-parented MNCs with

operations in China should assess their current

transfer pricing structure holistically under the

rules in China, United States, and any other

countries in which they have intercompany

transactions, in order to ensure alignment

and identify any potential internal conflicts or

inconsistencies between countries. While a

U.S.-parented MNC may prioritize the require-

ments of the U.S. transfer pricing regime, it

may be required to accelerate certain aspects

of their group transfer pricing documentation

required by countries such as China, in order to

properly assess, document and ensure align-

ment of group policies and results disclosed

to the various tax authorities.

Some examples of differences between

the U.S. and China in the timing and imple-

mentation of their domestic TPD rules include:

• RPTformsandLocalFile– The China rPT

forms and Local File have complex re-

quirements (e.g. value chain analysis, local

specific advantages and contribution to ex-

cess profits) that extend much further than

that required by the OECD’s master file or

the U.S. local transfer pricing documenta-

tion report. The value chain analysis cov-

ers transactions for the group and not just

those related to China, while other disclo-

sures are comparable to the specific and

detailed queries historically encountered

in a query or audit situation.

• MasterFile – Some countries (e.g. selected

European countries) have adopted the OEC-

D’s guidance on Master File “as is” while other

countries, like China, have incorporated the

OeCD’s guidance and included additional

information disclosures under local transfer

pricing legislation. Other countries, like the

U.S., have not released any transfer pricing

requirements on the Master File. However,

U.S.-parented MNCs may need to prepare

certain documents such as the Master File

in order to meet the local transfer pricing re-

quirements of China and its other overseas

operating affiliates, even though the IRS

does not explicitly require this document of

the U.S. parent. U.S.-parented MNCs should

pay attention to their Chinese entities with

annual domestic and cross border rPTs ex-

ceeding rMB 1 billion and develop a practi-

cal solution on Master File preparation.

• CbCR – In respect of CbCr, debates re-

garding the definition of items, alignment

of reporting periods, filing locations, etc,

are ongoing. Taking timing as an example,

the IrS will require U.S.-parented MNCs to

complete CbCr via a new reporting form

(Form 8975), which is applicable for finan-

cial years beginning on or after 30 June

2016, whereas the SAT requires China-par-

ented MNCs (or U.S.-parented MNCs

that nominate their China entity to file the

CbCR) to complete the CbCR via its report-

ing forms (G114010, G114011, G114020, and

G114021) for the financial year beginning

1 January 2016. This discrepancy creates

a “gap year” in which some U.S.-parented

MNCs have considered voluntary filing

of Form 8975 for the period on or after 1

January 2016 and before 30 June 2016.

Practically, for Chinese subsidiaries and af-

filiates of U.S.-parented MNCs, there is no

need to file the CbCR in China, unless the

U.S.-parented MNC has nominated one

of its Chinese subsidiaries and affiliates as

a reporting entity for the CbCR (which is

highly unlikely).

The new transfer pricing rules in China and

the U.S. are in a state of flux. The U.S. and China

are the world’s two biggest economies, and

their views and actions will profoundly impact

BePS initiatives. We have observed competing

views of both tax authorities on the interpreta-

tion of the arm’s length principle (e.g. imple-

mentation of intragroup services) and other

international taxation matters (e.g. indirect eq-

uity transfer).

U.S.-parented MNCs are likely to face

greater uncertainties in terms of transfer pricing

management in China and the U.S., resulting in

higher demand for mutual agreement proce-

dures and bilateral advance pricing arrange-

ments in order to eliminate double taxation

issues. For instance, these uncertainties may

arise out of enhanced scrutiny in China on out-

bound service fees and royalty payments, and

stricter guidelines in the U.S. on exhaustion of

remedies by the taxpayers for foreign tax credit

purpose related to transfer pricing adjustments

initiated by overseas tax authorities.

U.S.-parented MNCs should continually

monitor their business operations in China,

and consider the impact on the financial re-

sults and the overall transfer pricing model,

given that China’s economy is cooling down.

For more information on tax and trans-

fer pricing matters in China, MNCs can visit

http://www.pwccn.com/home/eng/taxli-

brary_cn.html I

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Noah Shaw

works at

APCO’s Beijing

office and sup-

ports APCO’s

MNC clients

in the ICT

sector. Prior to

joining APCO,

Shaw worked

at the Paulson

Institute in their

Chicago office.

He has also

interned at the

U.S. Securities

and Exchange

Commission

and the Beijing

International

Society.

With the Shenzhen-Hong

Kong Stock Connect

slated to come online by

the end of 2016, now is a good time

to consider some of the major chal-

lenges in China’s most recent attempt

to open markets to foreign investors.

This moment of reflection is brought

into sharper focus by China’s handling

of the bursting of the stock market

bubble a year ago. China’s initial at-

tempt to open up the mainland stock

markets, the Shanghai-Hong Kong

Stock Connect, had a very high level

of trading volume in early-mid 2015.

But since then usage has dropped

dramatically due to seeding concerns

about China’s efforts to internationalize

its markets.

The Shanghai - Hong Kong Stock

Connect was announced by Chinese

Premier Li Keqiang with much fan-

fare in April 2014. The purchase of

class-A shares, denominated in rMB,

had previously been limited to only a

handful of selected foreign organi-

zations that had obtained “Qualified

Foreign Institutional Investor” (QFII)

status. The wider opportunity to di-

rectly purchase Chinese shares was

welcomed around the world. Any in-

vestor with a stock account in Hong

Kong can now purchase selected

class-A shares on the Shanghai

Stock Exchange (SSE), and any main-

land investor with over rMB 500,000

in an account can now purchase cer-

tain Hong Kong-listed shares.

The Connect got off to a rocky start

in November 2014 when its opening

was delayed by a month amid pro-de-

mocracy protests in Hong Kong and

concerns that international investors

were given insufficient notice regard-

ing the tax and custody obligations

involved. But once open, investments

began to slowly increase both north-

bound – Hong Kong and international

money flowing into the China markets

– and southbound – Chinese money

flowing into the Hong Kong market.

By early 2015, average daily trading

neared the fixed daily quota of RMB

10.5 billion for the southbound leg and

rMB 13 billion for the northbound leg.

But following China’s stock market

turbulence in mid-2015 and again in

January this year, trading volume has

dropped. Since mid-2015, the monthly

northbound average daily volume

hasn’t even hit half of its quota.

Why has trade volume dropped

significantly? Global investors have

been scared off by the government’s

handling of the stock crash and its af-

termath. Margin trading, which grew

at a fast pace in late 2014 and early

2015, along with encouragement

from state media, contributed to the

bubble burst in July, after a run that

saw the key China stock indices more

than double in just eight months. After

a massive sell-off, Chinese regulators

temporarily suspended trading of

many shares and placed strict limits

on the sale of shares by institutional

investors, large investors, listed com-

pany executives and board members.

In the first weeks of 2016, months after

the initial crash, a newly-installed cir-

cuit breaker system, designed to halt

trading if the market fell by a certain

amount in a day, was triggered mul-

tiple times in just one week and was

quickly scrapped. The Chinese au-

thorities also invested a huge amount

of money to prop up the market.

International investors rightly be-

came wary of markets so prone to

bubbles, manipulation and sudden re-

strictions of selling. While opening the

markets to overseas investors is im-

portant, so are fair rules that all play-

ers understand. There were questions

raised about the ability of the Chinese

regulators to manage the markets and

their willingness to relax their grip over

the market. That led, amongst others

things, to the decision by the Morgan

Stanley Capital Index (MSCI) to yet

again decline to include A-shares in its

global indices.

Another concern for investors is the

recent devaluation trend of the rMB

which fuels the reluctance to hold too

much capital in rMB-denominated

assets. Chinese Premier Li Keqiang

and PBOC Governor Zhou Xiaochuan

have repeatedly stated over the past

few months that China has the tools

to avoid significant devaluation, but

the rMB has dropped by more than

6 percent against the dollar since late

2015. Traders are troubled by the re-

quirement that all trades involving the

Connect are settled in rMB.

In the past year there have been

signs of backsliding on the inter-

nationalization of Chinese markets.

While investors may be eager to

get their hands on class-A shares of

tech stocks, likely available once the

Shenzhen-Shanghai Connect comes

online, this comes as international in-

vestors are increasingly wary of Chi-

nese stock markets as a whole. even

if China continues to open equity

markets to foreign capital, the lack

of transparency and an unclear legal

framework will continue to serve as

barriers to investment.

China hopes to achieve market

economy status from the WTO in

December of this year. Providing for-

eign investors increased access to

the Shenzhen and Shanghai stock

exchanges could be important for

China’s image as the eU and the

United States decide whether to go

ahead with affirming China’s market

economy status. I

China’s stock Connect Has trouble Wooing Foreign InvestorsBy noah shaw

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Movers and shakers

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Latest Developments in U.s. FCPA enforcement By scott L. marrah and e.W. Gentry sayad

enforcement of the Foreign

Corrupt Practices Act of

1977 (FCPA) remains a high

priority for the U.S. Government.

The U.S. Department of Justice

(DOJ) is responsible for criminal

enforcement and the Securities

and Exchange Commission (SEC)

handles civil enforcement under

the FCPA. Most U.S. companies

and multi-nationals are all too

familiar with the staggering costs

of investigating and resolving

these matters. Below we sum-

marize the recent developments

and priorities for FCPA enforce-

ment and offer guidance regard-

ing complying with the FCPA.

focus on ChinaWhile the U.S. is aggressively

enforcing the FCPA around the

globe, much attention remains

focused on Asia and China spe-

cifically. There are approximately

25 current open investigations of

possible FCPA violations related

to activity in China. This number

does not include investigations

that have not been publicly re-

ported, involving private compa-

nies and/or new investigations.

There have also been a number

of recent resolutions with the

U.S. government related to ac-

tivities in China. For example,

on July 11, 2016, a U.S. technol-

ogy multinational agreed to pay

US$14 million to the SeC to set-

tle FCPA allegations related to its

Chinese subsidiary. Similarly, on

March 23, 2016, a large pharma-

ceutical company agreed to pay

the SeC $25 million to settle al-

leged FCPA violations involving

its use of third parties in China. In

the last five months, seven com-

panies have paid $88 million to

the U.S. government to resolve

FCPA allegations related to ac-

tivities in China.

focus on individuals

The DOJ has recently empha-

sized individual accountability

(as opposed to solely corporate

accountability) for FCPA viola-

tions. On September 9, 2015, the

DOJ issued a new policy (referred

to as the “Yates Memo”) on indi-

vidual accountability, including

under the FCPA. The policy pro-

vides, in part, that: (1) to receive

cooperation credit, a company

must turn over all relevant infor-

mation on the wrongdoing of indi-

viduals; (2) all DOJ investigations

will focus on individual wrongdo-

ing from the onset; (3) individuals

will not be released from civil or

criminal liability absent extraordi-

nary circumstances; (4) corporate

actions should not be settled

without a clear plan to resolve in-

dividual cases; and (5) civil attor-

neys should evaluate whether to

bring a suit against an individual

based on consideration beyond

the individual’s ability to pay. This

focus on individual accountability

will have a significant impact on

the resolution of future FCPA al-

legations and investigations.

establishment of Pilot Program

On April 5, 2016, the DOJ an-

nounced a new FCPA enforce-

ment Pilot Program. The DOJ

stated that the Pilot Program

is intended to deter FCPA vio-

lations, encourage implemen-

tation of anti-corruption com-

pliance programs and increase

prosecution for individuals

whose conduct may have gone

undiscovered. Under the Pilot

Program, a company can receive

up to a 50 percent reduction off

the bottom of the U.S. Sentenc-

ing Guidelines fine range if the

company voluntarily discloses

misconduct, fully cooperates

and takes timely and appropriate

steps to remediate the issues

discovered. In one recent mat-

ter, while the company agreed

to pay the SeC US$14 million in

civil penalties, under the Pilot

Program, the DOJ declined to

pursue criminal charges. Simi-

larly, under the Pilot Program, in

June 2016, the DOJ also closed

inquiries regarding two other

companies for alleged miscon-

duct by their Chinese subsid-

iaries (though one paid approx-

imately $322,000 and the other

paid $672,000 to resolve matters

with the SEC).

increased govern-ment resources and

collaborationThe U.S. government is also

committing more resources to

investigating and pursuing po-

tential FCPA violations. The DOJ’s

Fraud Section has increased its

FCPA unit by more than 50 per-

cent by adding ten federal pros-

ecutors. The FBI has established

three squads of special agents

devoted to FCPA and related in-

vestigations. In addition, the DOJ

has noted that approximately ten

FBI agents are currently stationed

outside of the United States in-

vestigating FCPA and related

crimes. The SeC's enforcement

Scott L. Marrahis the co-

leader of the

government

enforcement

& investiga-

tions team

at Kilpatrick

Townsend in

Atlanta. A

former assistant

United States

attorney in the

Southern District

of New York, he

conducts FCPA

investigations

and training for

multi-nationals.

He is a frequent

speaker on

anti-corruption

topics in China.

POLICY PERSPECTIVES

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Division has also instituted a spe-

cialized unit committed to FCPA

enforcement.

In addition, the DOJ has been

strengthening cooperation with

foreign governments. In Septem-

ber 2015, after President Xi visited

with President Obama, the Chi-

nese Foreign Ministry announced

that China and the U.S. “agree to

enhance practical cooperation in

corruption prevention . . . [and]

combating transnational bribery.”

As part of the Pilot Program, the

DOJ noted that it is “strengthen-

ing its coordination with foreign

counterparts in the effort to hold

corrupt individuals and compa-

nies accountable.”

What to do?As news reports reflect almost

daily, Chinese authorities are also

prioritizing combating corruption.

Given the DOJ's and SeC’s con-

tinuing focus on FCPA miscon-

duct, specifically in China, and

the increased focus of Chinese

authorities, companies must take

action to ensure compliance. It is

imperative that all U.S. and multi-

national companies have in place

compliance programs to prevent

and detect potential FCPA vio-

lations. While the breadth and

scope of a compliance program

is unique to each company’s risk

profile, in general, companies

should: (1) institute or update

compliance and anti-corrup-

tion policies; (2) emphasize the

importance of compliance and

empower compliance profes-

sionals within the company; (3)

routinely analyze risk and per-

form FCPA and anti-corruption

risk assessments; (4) train all at-

risk employees (including senior

management and boards) and

third parties (including, for ex-

ample, agents, representatives,

joint-ventures, licensees and

vendors); (5) monitor employees

and third-parties; and (6) con-

duct FCPA due diligence before

transacting with third-parties or

purchasing or partnering with

another company. In this climate

of aggressive enforcement, it is

critical to implement effective

and efficient risk-based anti-cor-

ruption policies, procedures and

programs and to diligently mon-

itor compliance. I

E.W. Gentry Sayadis the co-chair of

the Asia Practice

at Kilpatrick

Townsend. He is

the legal advisor

to AmCham’s

Board of Gover-

nors and is the

vice chair of the

Legal Commit-

tee. His practice

focuses on M&A,

compliance and

other issues for

US and Chinese

companies.

27

Sept

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6

Movers and shakers

Unplugged: What China’s Internet and Data restrictions Mean for U.s.Companies and China’s economy

Internet access, restrictions and quality is

a growing challenge for U.S. companies

operating in China. In AmCham Shang-

hai’s 2016 China Business report, this issue

was named by 81 percent of respondents

as a top business challenge, ahead of unfair

regulatory treatment, intellectual property

rights protection and investment restrictions.

requirements for local data storage and

proposed regulations mandating the use

of “secure and controllable” technologies in

certain industries - banking, insurance and

healthcare - are also a concern. Collectively,

these limitations and restrictions limit the

ability of American ICT companies to expand

in China and hurt the productivity of small

and large American companies.

Chinese companies and China’s eco-

nomic development also suffer. Becom-

ing a more innovative economy is a high

priority for the Chinese government. Inno-

vation dominates the 13th Five Year Plan,

the country’s development blueprint

for 2016-2020. China has spent billions

of dollars on special investment funds,

subsidies, and incubators to spark do-

mestic innovation. However, slow inter-

net speeds, blocked access to important

websites and resources, and restrictions

on where data can be stored and on what

equipment, impede innovation. China

wants to exploit the power of the internet,

but government policy limits how China

can benefit from it.

Business barrierse-commerce and digitization have

transformed the Chinese economy and

made the internet a core issue for Amer-

ican companies doing business in China.

Companies need the internet to access

information, connect to their offices

around the globe, engage with custom-

ers, and access innovative programs and

software to improve productivity. Ameri-

can ICT companies also play a large role

in China’s massive ICT market. In the past

few years, however, the Chinese govern-

ment has increased its scrutiny of the in-

ternet and introduced many draft regula-

tions and restrictions on internet content

as well as the hardware that supports the

internet. New draft regulations and rules

also affect how companies manage data.

For many member companies, China’s

internet restrictions are more than an in-

convenience. Often they pose significant

barriers to doing business in China. The im-

pact on large companies may be limited as

they often have dedicated trunk lines that

ensure unfettered internet access. How-

ever, internet restrictions can limit these

companies’ ability to provide seamless

service to customers. Most small busi-

nesses cannot afford dedicated trunk lines

and are more vulnerable to internet limita-

tions. Some cannot use popular software

programs based outside of China that re-

quire the use of a VPN. While there may be

equivalent Chinese programs, companies

should have access to cloud-based solu-

tions on a global basis, no matter where

those solutions are hosted or headquar-

tered. Companies should be able to make

these decisions based on business needs

and not because of government mandates.

After all, Chinese companies operating in

the United States can freely use cloud-

based solutions based in China.

Development challengesAmCham Shanghai supports the Chi-

nese government’s efforts to develop its

economy. American companies are active in

China and benefit from a strong, innovative

Chinese economy. Many American compa-

nies conduct r&D in China and all seek to

improve productivity. But a restricted inter-

net interferes with these goals and is harm-

ful not just for American and Chinese com-

panies but also for China. A freer and more

open internet can support and accelerate

China’s economic development.

Current internet restrictions also ham-

per Shanghai’s goal of becoming an in-

ternational financial center by 2020 and a

science and innovation center with global

influence by 2030. Financial, science, and

innovation centers require the free flow of

information. Banks are investing heavily in

financial technology and Singapore and

Hong Kong are becoming hubs for innova-

tion in this area. For Shanghai to play a sim-

ilar role, it needs a fast and open internet.

Companies also rely on accurate and bal-

anced information. Important sources of fi-

nancial news and analysis include The Wall

Street Journal, Bloomberg, The Economist,

reuters, and The New York Times, yet all are

blocked in China. Shanghai will struggle to

compete with cities like Hong Kong, Tokyo,

and Singapore that have faster and more

open internet systems.

recommendations To improve the business climate and

support innovation, we recommend that

the Chinese government take the follow-

ing actions:

1. Eliminate “secure and controllable”

requirements for procurement of IT in-

frastructure products. Instead, ensure

a secure cyber economy through pol-

icies that encourage competition and

customer choice, are open to non-in-

digenous technologies, and involve di-

alogue between industry and govern-

ment.

2. Reconsider data localization re-

quirements.

3. Continue to solicit input from the

private sector on draft regulations.

4. Eliminate restrictions that block

access to information on the internet.

This policy can first be introduced in

the Shanghai FTZ and then extended

throughout China. I

This is an excerpt from AmCham Shanghai’s

Viewpoint of the same name. To read the full

report, visit AmCham Shanghai’s website.

POLICY PERSPECTIVES

(86 21) 6297 7119-5667 Zoe Zhang zoe.zhang@amcham-shanghai.org

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Member Focus

Cameron Johnson, a member since 2003, first came to

China when he was 19 years old. Beginning in 2002, he

has lived here full time, working for Microsoft, Costa

Coffee and now at Sigmatex, a manufacturer of carbon

composite materials.

What did you learn at Microsoft that you apply to your current work?

Working in China and/or Asia is complicated and far different from

the West, whether it’s culture, business-style or expectations. At

Microsoft, we dealt with multiple reporting lines (U.S., China, Hong

Kong, Taiwan), and learned how to balance wildly different expec-

tations, KPIs and business needs between different organizations,

cultures, and management (some of whom were not related to the

business but wanted their say regardless).

Twelve to sixteen-hour days were common, with the expectation

that you didn’t leave until the boss left, which was around 12 a.m. or

even 2 a.m., and that you were back at work by 9 a.m. You had to be

focused and efficient to get home at a decent time. I later learned

that one needs a champion/mentor to help guide, consult and give

functional feedback for both your personal and career development.

 

Costa Coffee is owned by a British firm. Can you tell us about the

good and bad of operating at arm’s length from head office?   

Being at arm’s length has the benefit of being more independent

and flexible to run the business. On the other hand, successes and

challenges may not be seen or truly appreciated. With this, commu-

nication and managing expectations is critical on both sides. For ex-

ample, issues that the West sees as major are seen as insignificant

or not worth much attention in Asia.

You had an interesting experience involving coffee lids. Can you

elaborate?

Costa Coffee ran a large portion of their supply chain through a

company called Tiger Global, which produced and sourced prod-

ucts in China.  One challenge was to get the coffee lid supplier to

line up the ‘s’ in Costa with the lid’s mouth opening. In the UK, it is

seen as a branding issue and critically important to the product; in

China, the manufacturing staff thought it was annoying to have to

constantly center the hole. Their attitude was that people could still

drink and use the lid, so who cares?

The lids were produced by someone who stood and manually

punched lid after lid. The workers were tired, bored, or both, and

this caused production errors. The centering of the mouth hole took

several seconds per lid, which added up to a significant amount of

shift time. In this situation a bridge needed to be built, but also a

solution found that satisfied both sides while resolving the problem.

The factory eventually ordered a machine to do the task, and the

workers were placed elsewhere. Production time decreased per

part, driving factory efficiency, and the centering of the ‘s’ was re-

solved for the brand. The result pleased everyone.

 

Sigmatex carbon fibers are used in products like Formula One

racing cars, lightweight bicycles, yachts and aircraft. How do

you transform the fibers for these uses?

Our products are converted from a fiber into a fabric or pre-form, cus-

tomized by weight, length, width, pattern, material, etc. Our custom-

ers then either infuse it or put it through a resin impregnation process,

which can then be used to mold into a part. Some products that use

our material are hockey sticks, bicycles, the Audi rS8 and McLaren P11.

What advantages do your carbon products have over traditional

carbon fiber?

We have a large r&D team that works with customers to cater the

material to their needs, something few in the industry do. There are

standard products in the industry that we produce as well, but most

customers want a specialized material to fit their process, cost, de-

sign, etc. We are now working with several automotive companies

that use specialized carbon material designed by our r&D team to

Bicycle

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Movers and shakers

31

suit their performance and process needs. They are the first in Asia

to do this, and it is driving technology in the industry in our region.

Carbon composites have a higher energy-absorption rate than

steel, enable greater fuel efficiency and work well with materials

like fiber, plastics, metals, wood, and concrete. They are suitable for

complex designs, have superior fatigue properties, high heat toler-

ances and are corrosion-resistant. The strongest carbon fiber is 10

times stronger and five times lighter than steel.

What are your primary markets in China and Asia?   In Asia, our

products are used in sporting goods, automobiles, aerospace and

marine applications. For example, we recently signed an agree-

ment with reebok for one of our products to be used in ice hockey

sticks. The special carbon fabric is 20 percent lighter than traditional

carbon fiber fabrics and has a high strength-to-weight ratio. Alibi, a

Thai manufacturer of catamarans, also uses Sigmatex products as

do several european auto manufacturers.

From our Shanghai facility, we produce a customized material

for the RX1E airplane in China, which is the world’s first electric pas-

senger plane. There are also several large OeMs that use Sigmatex

material in China which is then is exported to the U.S. and europe.

Foreign companies face considerable competition from local

startups.  Is it the same in your industry? 

We face two strong headwinds. First is the large black market,

which industry figures estimate is as much as 80 percent of the

total market. The second headwind is new entrants entering the

market every year. Our work is very similar to companies that use

glass fiber material for wind blades, boats, etc., so when the market

in glass is down, they can jump into other composite markets to fill

business. Some already have very close relationships with automo-

tive or aerospace companies so a large part of their business will

be built already. Part of the challenge as a foreign company is to

become integrated into the supply chain locally, and viewed as a

“local” supplier with foreign expertise, instead of a “foreign” supplier

that’s trying to enter the local market.

 

China wants to support domestic high-end manufacturing. Will

this put you at a disadvantage to local manufacturers that may

enjoy state support?  

Definitely, but it is also a chance for partnership. Our industry is some-

what niche, with not too many large players, given the high barriers to

entry for many products due to cost, machinery and lack of local ex-

pertise. But with the push for high-speed trains, light-weight cars and

buses in the new five-year plan, companies already in the market with

close ties to the government are winning contracts. This is a chance

to work with those companies, supply chains and industries that have

state support and/or state projects, but need foreign expertise.

The industry is still young in China, and having the chance to form

those key partnerships in the beginning and integrate into the process

and projects is a blessing. This is something many companies miss

because they view the end game/profit instead of the process. China

and Asia are places where the relationship business model is important,

meaning the relationship and process is just as important, if not more,

as closing the deal.  

How do you protect the IP of your most sophisticated products? 

We don’t bring it into China and are not connected to any com-

pany servers outside of China, so the risk of hacking or losing IP is

lower.  We have specialized IP we would like to bring, and are cur-

rently designing a system to protect it, but this takes significant time

and resources to ensure it is secure and even then, the risk is always

there.

 

You mentioned that your industry is known for fake supplies.

How do you sell against these? Are foreign buyers more willing

to purchase from you than Chinese manufacturers?

Our industry is driven largely by raw material cost, so our competi-

tors in the black market do not pay duty, VAT or other taxes. Some-

times they also substitute materials or lower invoice values in order

to pay less. To combat this, we have implemented full traceability

based on AS9100C requirements (an aerospace version of ISO9001)

so that customers can trace material back to the original manufac-

turer. Foreign and local customers want that security of knowing

where the material is coming from and that what they are buying

is real and will perform as expected, and our traceability helps win

business. It also helps us with suppliers as they are confident that

customers are buying “real” products from us. We also have a focus

on using our “foreign” expertise in product and process design to

help our customers gain an edge; this helps against the competi-

tion as most producers will not do this.

 

Staff retention in China is difficult. What do you do to reduce em-

ployee turnover?   

We show appreciation for work, allow flexibility when family issues

arise (several pregnancy issues have arisen and we give time off

to deal with these), and offer training outside employees’ defined

roles. We give direct responsibility to section heads, allowing them

the flexibility to run the business with little interference. We also

have twice weekly meetings to review issues and strategy, giving

employees a voice while at the same time training them.

 

You spoke about advocating for women in the workforce. Do you

see a glass ceiling in China for women?

The talents of women in China are underappreciated and under-

utilized. In our Asia business, two women run large portions of the

business. They are entrusted not only with staffing, operations and

finance but also with ensuring that the company is protected from

mistakes (such as mine). 

A few months ago, a decision was made on a commercial issue.

Our finance manager came in a few hours later and said “that’s a

bad decision, we should do this instead.” A local manager might have

reprimanded her, but we try to foster an environment where feed-

back, ideas and critical thinking, even if tough to receive, are valued

and considered.  And she was right!  We were saved from a horrible

decision. No man in the team saw it, but she did!  That different view-

point and perspective is essential not only to running a company but

also for having foresight and strategic planning in the business. I

MEMBER NEWS

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GoVernors

MEETING ATTENDANCE

Present: Jimmy Chen, Mike Crotty, Ker Gibbs (Chair), Cecilia

Ho (by phone), Tim Huang, Ning Lei, Glen Walter,

Cameron Werker, Vincent Yang, Helen Yang, eric Zheng

Apologies: Aina Konold, Nancy Leou

Attendees: Kenneth Jarrett (President), Gentry Sayad, Helen

ren, Titi Baccam, Patsy Li, Linda Wang, Jessica Wu

Ker GibbsChinaBio

Cecilia hoInternational Paper Asia

CHairman

ViCe CHair

Jimmy ChenFedEx Express

michael CrottyMKT & Associates

timothy huangBank of America Merrill Lynch

aina e. KonoldGAP Inc.

ning Lei Lei & Company

Glen WalterCoca-Cola

helen Ching-hsien YangDuPont

Vincent YangSKF

eric ZhengAIG Insurance

Board of Governors Briefing

Board Gets Update on Membership Drive, Budget and NEC Highlights from the August 25, 2016, Board of Governors Meeting

neC Committee aPProVaL

The board unanimously approved the appointment of Han Lin,

Laurie Underwood, Shirley Zhao and Dan Krassenstein to the

Nomination and election Committee. Jimmy Chen had previou-

sly been approved as the committee’s Chair.

BoarD CHair seLeCtion ProCess

Board members discussed the pros and cons of having the

Board select the Chair rather than having the Chair directly

elected by the members. This would require an amendment

to the Chamber’s constitution, and there was support from

the board for including such a proposal in the upcoming ge-

neral election.

WasHinGton DoorknoCk (sePt. 19-21)

The board received an update on topics to be addressed on the

Washington Doorknock. These include support for the BIT and

TPP and also emphasizing the benefits of Chinese investment

in the U.S. While providing a balanced look at the business en-

vironment in China, the delegation will also raise member con-

cerns, particularly around cyber security and data localization

in the financial services sector reform.

2016 first-HaLf BUDGet rePort

The president reported that despite the current membership

drive, revenues remain below target. Corporate Visa Program

revenue, in particular, was below target. Staff are taking co-

st-cutting measures and working to realize the break even

budget put in place for 2016.

The AmCham Shanghai 2016 Board of Governors

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MEMBER NEWS

Event Report

fUtUre LeaDers of tHe Year aWarDs CeremonY

AmCham Shanghai announced the winners of the 2016 Future

Leaders of the Year Awards at the Four Seasons Hotel on August

2. The awards celebrate the contributions and value of investing

in young talent.

Kim Xu, chief digital officer and vice president of digital sales

at IBM Greater China, delivered a keynote speech with advice

and hope for future leaders. “We came together today because

we hope to find common interests and value systems. We can all

associate with a higher purpose and as a catalyst, we can change

the world as future leaders,” she said. Xu also spoke about the

sacrifices needed to become a leader. “The difficult moment [in

becoming a leader] is when you disagree with everyone and you

are willing to put your badge on the table. [It’s when] you’re willing

to sacrifice and give up everything for what you believe,” she said.

After reviewing a large pool of nominations, a panel of judges

used a strict set of criteria to select winners in three categories:

the Future Leader of the Year Award, the US/China Business ex-

change Award, and the entrepreneurship Award. In addition to be-

ing recognized on stage, all winners received rMB10,000 in Am-

Cham Shanghai training credits.

Zhen Xi Zhong, executive director at Shanghai roots & Shoots,

was awarded the Future Leader of the Year Award. roots & Shoots is

a program designed to educate youth about environmental issues

and humanitarian values with a special focus on group interaction.

The Shanghai branch of roots & Shoots was founded as a volunteer

organization in 1999.

ray Wang, director of marketing at Harcros Chemicals, was awarded

the US/China Business exchange Award. Harcros Chemicals is a dis-

tributor and manufacturer of both industrial and specialty chemicals.

eric Loh, CeO of Vocinno Technology Inc., was awarded the en-

trepreneurship Award. eric Loh founded his mobile applications de-

velopment company, Vocinno Technology, which focuses on helping

Chinese teenagers’ mental health.  His company launched a social

app in 2014 called “Bengjiujie.” The app aims to help address and

create a forum for emotional and social issues facing Chinese youth.

WorksHoP series: CreatinG an effeCtiVe Gr ProGram

AmCham Shanghai held the first session of the Government Relations

Workshop Series on Creating an Effective Government Relations Program

on July 13. Jim McGregor, chairman of Greater China for APCO Worldwi-

de, provided an overview of how companies structure their GA teams and

shared strategies and best practices for creating an effective GA program.

The workshop also included a panel discussion which was moderated by

McGregor and included Nina Wang, vice president of Government rela-

tions at Johnson Controls Inc, Sarah Crawshaw, managing director of Taylor

Bennett Heyman, and Jimmy Chen, the regional vice president at Fedex

express.

The speakers agreed that the GA function plays an increasingly

important role in China’s “New Normal”. While there are different GA

structures within companies, the speakers agreed that it was impor-

tant for the GA function to have access to decision makers within the

company and not to be limited to the legal department. To succeed,

GA practitioners need to have a good understanding of China’s po-

licies such as Made in China 2025, Internet Plus, and One Belt, One

road and be able to explain these policies to company leaders.

The speakers also emphasized the importance of building good

relationships with both local and central government officials through

maintaining regular contact and providing these officials with informa-

tion and assistance on meeting their goals. For example, companies

can provide officials with industry best practices or strategies on difficult

issues. They recommended against raising problems or complaints du-

ring the first meeting with an official as this would not be effective in

resolving the problem and not lead to a strong long-term relationship..

“HoW to” WorksHoP series: HoW to Get YoUr “CHinese

BranD name” riGHt

Foreign brands coming to China are faced with the unique and

difficult challenge of successfully developing an appropriate Chi-

nese name. AmCham Shanghai’s latest “How to” Workshop Series,

which focused on getting your Chinese brand name right, was

hosted by Jerry Clode, Director of SMArT @ resonance China.

Clode said that failing to adopt a Chinese brand name is a “market-

ing deathblow” and provided a blueprint for the process of creating

a name. He also highlighted several issues that one should avoid.

After outlining the fundamental concerns regarding a Chinese

character’s sound, meaning and appearance, Clode walked through

his “10 Mantras” for the process. Key among these was to avoid simply

translating your company or product name, which can accidentally

lead to strange or inappropriate meanings, and instead focus on a

name that “communicates your brand essence.” Perhaps most im-

portant of all, Clode stressed the importance of testing the name with

locals and checking it against at least the major regional Chinese di-

alects to ensure that its meaning isn’t misunderstood by customers

from different regions or those with different backgrounds. He also

stressed the importance of thinking about the defining elements of

a company that it would hope to communicate through its name, as

well as considering any potential problems or misunderstandings. I Winners and judges of the Future Leaders of the Year Awards

AmCham Shanghai

Future Leaders of the Year Awards Ceremony

Paul Leinwand discusses successful

business strategies at an Author Series event

A panel discussion on retaining startup talent

A briefing on attracting and retaining talents for startups

AmCham Shanghai Month in Pictures

A panel discusses how to create an effective GA program

Chairman of APCO China James McGregor at a GR event

Members network at the Future Leaders

of the Year Awards Ceremony

Jerry Clode discusses how to create local Chinese brand names

The winners of the Future Leaders of the Year Awards

U.S. National Security Advisor Susan Rice at a roundtable event

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Committee Chair’s Corner

A Chat with Callum Douglas

We talk with Callum Douglas, director of corporate responsi-

bility at PwC China and Hong Kong. He is the co-chair of the

Business Council for Sustainable Responsibility (BCSR).

What are the top challenges facing CSR programs in China?

Companies trying to run responsible businesses are still faced with

public trust and corruption issues across China, and this happens at

many levels. Whether working towards checking the many layers

of suppliers in your supply chain management programs, running a

multi-stakeholder community program, or just going about business

in an ethical way, I still see this as the number one challenge. Secondly,

amongst the general public, CSr is still not very well understood and

many practitioners still struggle to explain their roles to people. In

addition, while there is growing evidence of CSr programs being

linked to core business and strategy, it doesn’t happen across the

board, and many practitioners struggle to engage their leadership

and get them to really integrate CSr into the business. Finally, for

those companies engaging with foreign NGOs as part of their CSr

programs, there is now the additional navigation and understanding

required because of the new Foreign NGO Law.

In which industries do you see the most impressive CSR

programs being implemented?

There are some companies taking the lead, but I don’t think we see

one industry really standing out among the group across all areas

of CSr. The companies doing well are the ones that see the value

CSr brings to their company and grow their business accordingly.

I think some of the best efforts are from companies that are

embracing innovation to tackle social problems. Increasingly

these are coming through as new - and viable - business models

rather than as philanthropy. When innovation and philanthropy

come together, there are great results to be had.

Some say the Sichuan earthquake in 2008 marked a change in

Chinese attitudes towards CSR, generating an unprecedented

number of donations. Do you think that event prompted the

government to promote CSR programs?

I think there are several catalysts over the past decade that led

the government to push CSr programs, and in a much broader

sense than disaster relief and humanitarian efforts. The Sichuan

earthquake may have been one, especially for donations and

willingness to volunteer. However, there has also been the need

to respond to the pollution issues in China and to engage with

the various stakeholders causing and affected by that pollution,

which resulted in the environmental law being passed in January

2015. There has been a focus on harmonious society since then

and companies have been keen to refer to this in their programs.

Through this, we see many companies engaging with migrant

workers and communities supporting the urbanization of China

but who struggle to be accepted in society.

Supply chain management arising from food safety incidents

and threats must continue to be a huge part of CSr programs

for companies which have supply chain risks, and more recently

a strengthened focus on the reputation and conduct of Chinese

businesses operating overseas, particularly in African nations. So

while a lot of this did come to a head around 2008, the government

has continually pushed new and relevant policies and plans which

have helped CSr progress rapidly in China.

A growing number of private philanthropic foundations have

been established by wealthy Chinese in recent years. But

philanthropy is not as common as it is in the U.S. What would

make more wealthy Chinese donate?

One development which I hope will be an enabler for this

is philanthropy trust funds as highlighted in the new China

Philanthropy Law. This will help make it more straightforward and

efficient for wealthy people to transfer their wealth to charities.

There is still a question of people being concerned about their

financial security rather than having money to donate. These are

not unusual attitudes for a country where wealth and disposable

income are relatively new compared to the U.S.

Do you see more emphasis on CSR programs at state-owned

enterprises or private multinational companies?

We see a difference in the kind of programs run by different types

of enterprises. SOes have had to report more formally on CSr due

to regulations, but this tends to be compliance-based, whereas

the private companies may be coming from either more of a

‘do the right thing’ angle or are driven by stakeholder demand,

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Movers and shakers

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and believe that what they are doing also brings value to their

company. But as CSR is still relatively young, it can be difficult to

tell the differences beyond a superficial look. This will change as

the market and expectations mature.

The concept of “going green” was one of the pillars of China’s

13th Five Year Plan. Do you believe the added emphasis on

sustainability will be borne out in results?

Yes, absolutely. We have the 13th Five Year Plan and also the

Paris Agreement and the Sustainable Development Goals [a U.N.

initiative] coming through, all in a very short space of time. In the

recent Global CeO Survey which PwC conducted, we see that 74

percent of Chinese CeOs are making changes in how they minimize

the social and environmental impacts of their business operations

in response to changing stakeholder expectations. I think we’ll

see a lot of movement in this space, and a lot of opportunity for

companies that are able to innovate and provide services which

can bring about sustainable solutions for business.

Some Western companies use CSR to attract graduates.

Do young Chinese really care about CSR?

Yes, young Chinese do really care about CSr! More broadly than

that, interest in CSr is typical from millennials who don’t just care

about salary - they also care about values, quality of life and CSr

programs they can get involved in. Many MNCs are quite rightly

ensuring that their CSr and values feature prominently in their

graduate recruitment websites and campaigns. It helps show

young people, for whom a job is not ‘just a job’ anymore, that there

is a whole lot more to working at these companies than what is

detailed on their job descriptions.

What can professionals do to ensure that senior company

officials take CSR more seriously?

Make it matter to them. Show them the value that CSr programs

bring, what benefits managing supply chain and reputation risk

brings, that demonstrating strong governance, innovation and

engaging with stakeholders brings value. It’s important to show

the value as perceived by your stakeholders and value for the

business too. CSr adds value to organizations on so many levels,

including increased brand reputation, attracting, developing

and retaining good people, risk mitigation – the list goes on. But

often this needs to be pointed out using specific examples so

that leadership can really grasp them. In the PwC CeO survey,

research shows that 72 percent of CEOs in China say that in five

years’ time, corporate responsibility will be core to everything they

do. Statements like that are hugely encouraging to me in general,

and a great tool for engaging leadership. I

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Esoterica

Baijiu Nights

Most foreigners who live in China learn not

to tangle with China’s most notorious and wi-

dely-drunk form of alcohol, baijiu. Some ac-

quire this knowledge vicariously, the less-for-

tunate through hard-bitten experience.

run-ins with baijiu have left friends in

hospital, others close to comatose, and in the

case of one Briton, prone in the aisle of an air-

craft. His route to inebriation was not atypical:

an extended lunchtime banquet following the

inking of a power station financing deal in the

mid-1990s.

The Brit was an accomplished drinker but

late-night negotiation sessions had weakened

him, and anyway baijiu has a kick all of its own

and can catch the uninitiated unawares. By

the time he and his colleagues escaped the

banquet for the airport they were already lo-

sing ambulatory function. The cabin crew, ob-

viously alerted in advance by local authorities,

laid him in the aisle – ready for takeoff. He was

still lying there when the plane landed.

Westerners’ efforts to avoid baijiu could fill a

thick book. The colorless firewater, usually ser-

ved at banquets in deceptively small glasses

has been discretely tossed over shoulders,

poured onto carpeted floors, emptied into hid-

den bottles, surreptitiously tipped into soup tu-

reens or watered down on the sly in between

toasts. Some of the most hardened “Old China

Hands” have invoked alleged cancer condi-

tions, esoteric liver diseases, religious restric-

tions and pregnancy to escape the bitter si-

de-effects of a determined effort by the

Chinese members of the banquet party to get

everyone plastered in the shortest time possi-

ble. A serious baijiu session, often unavoidable

in certain parts of the country, can leave you

sweating noxious fumes for days.

It is of course subjective, and there are

clearly those who like the drink, but for me

baijiu’s only redeeming quality is that every

glass tastes better than the last.

Depending on who you believe, baijiu (lite-

rally “white alcohol”) has been around for

anywhere between 600 and 5,000 years.

Made from fermented grains, there are

thousands of varieties with different tastes.

The best examples are said to be sor-

ghum-based. Alcohol content generally ho-

vers between 40 and 60 percent, which

explains its considerable impact on the unwa-

ry as well as on the long-term health of dedi-

cated drinkers. ＼

Shanghai and the coastal regions to the

south have traditionally generally passed on

baijiu, preferring the more mild huangjiu (“yel-

low rice wine”), which is made of rice. In the

north and the west and in more remote areas,

however, baijiu remains a mainstay of both re-

creational and official entertaining. In some

places baijiu has thankfully largely been re-

placed by grape wine at banquets, or at least

offered as an alternative. But the choice of ei-

ther baijiu or red wine is often a polite feint,

and your Chinese hosts may really want you

to allow them to drink their local variety of

baijiu. Depending upon where you are in ne-

gotiations that might be the wise thing to do.

Spare a thought, however, for the officials

who have long borne baijiu’s brunt. Shackled

by cultural mores, there is often no escape.

A Western former journalist recalls working

with some officials in Gansu and Inner

Mongolia a decade ago who are now dead

because of the stuff. An unintended conse-

quence of President Xi’s crackdown on go-

vernment entertainment is that it may save

others. I occasionally wonder about the lon-

gevity of the two Chinese gentlemen who

introduced me to baijiu.

I was flying from Beijing to Qingdao in the

summer of 1999, and I was the only laowai

aboard the plane. Foreigners in China were

still something of a novelty, and two fellow

passengers befriended me. After landing,

they drove me to the city center, found me a

hotel room, and offered to take me to a har-

borside restaurant for dinner. It was downhill

from there.

Xu Ximao, Deputy Section Chief of the

Foreign enterprise Department of the Qingdao

Council for the Promotion of Overseas

Investment (I still have his name card), was

proud of Qingdao’s beer, and ordered bottle

after bottle, all of which we drank. We raised

our glasses to friendship, to our respective

countries, to the fraternity of nations, to interna-

tional harmony, to the Allies’ defeat of Japan, to

the port of Qingdao, to the Foreign enterprise

Department, and so on. each celebration was

punctuated with a cry of “ganbei” and an upen-

ding of glasses. Somewhere between these li-

quid inhalations we ate seafood. Then Mr. Xu

asked the waiter for a bottle of baijiu.

Moments like these are tipping points.

The wise veterans know what lies ahead

and retreat. Neophytes press on, embolde-

ned by the alcohol and an inflated sense of

self-worth. After two hours of camaraderie

and back-slapping I felt as if I had sin-

gle-handedly erased the Chinese memory

of the Opium War; that any further Anglo-

Chinese rapprochement would be traced

back to this very evening. The baijiu could

only make things better.

Two shots were enough to ratchet up the

evening’s tempo. The baijiu tasted like hell but I

didn’t care. Mr. Xu and his colleague stood on

their chairs and sang revolutionary songs. I re-

sponded with barely remembered english

hymns. The other diners watched more closely

as the antics degenerated. With each additional

glass, Mr. Xu became more animated, his inner

Bacchus unleashed. Soon he invited the nei-

ghboring diners to share a drink with us. Next,

arms spread wide like a benevolent Caesar, he

began summoning all the other patrons. Table

by table they marched up. Shot-by-shot, yet

another laowai passed into the void. I

MEMBER NEWS

By ian Driscoll

Different labels, same effectIM

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INA